Employers scramble to evade 2% second-generation NHI tax rate

By Ted Chen, The China Post

TAIPEI, Taiwan — To evade an upcoming new tax, employers are rushing to pay out year-end bonuses prior to Jan. 1, 2013 before the terms of the second-generation National Health Insurance (NHI) take effect.

Under the new second-generation NHI system, a 2-percent supplementary premium will be levied on nonpayroll incomes exceeding NT$5,000 for the following six categories: bonuses of more than four months of an individual’s monthly salary, professional practices, stock dividends, interest, rent and freelancing. Estimates indicate about 3 million individuals will be effected.

In the interest of their employees, companies are choosing to pay out the bonuses prior to the end of 2012, as opposed to the convention of paying just prior to the Chinese New Year holidays around January or February, in order to avoid the 2-percent premium. This trend is seen markedly in the lucrative banking, as well as food and beverage industries, where many companies are paying out year-end bonuses exceeding four months.

The case for gifts and cash prizes given out during year-end banquets is different. Typically, high-value gifts such as automobiles, department store gift certificates, shares and cash are put up to be drawn by lucky employees. These gifts are not subject to the 2-percent premium even if resold for cash.

An NHI bureau official explained that the 2-percent premium may be imposed on banquet gifts only if they were declared by the company as part of a payroll. In the case of a manager offering to add to the pot out of pocket, those sums of prize money will also not be subject to the 2-percent premium, the official added.

“There are many ways to evade the 2-percent premium,” said a member of an NHI watchdog group. Many bank customers have begun to ask for interest payments to be split into portions lower than NT$5,000, while many property owners have changed their rental payment terms from monthly to weekly.

For other nonpayroll income source categories, many professionals such as freelancers and teaching assistants have begun to ask to be paid in separate transactions of lower than NT$5,000. However, evasion is not without its consequences, as the splitting of payments may result in higher administrative costs. In addition, the practice of paying out bonuses in the guise of overtime may not be feasible, as currently regulations dictate that no more than 46 hours of overtime may be declared in a single month. An individual declaring all 46 hours of overtime over many months may be subjected to audit.