Earlier this year, the 169th executive meeting of the State Council announced to expand the application scope of preferential personal income tax for commercial health insurance from the original 31 central cities to the entire national market. The State Council executive meeting decision signaled comprehensive support for the rapid development of commercial health insurance. Shortly after, Ministry of Finance (MoF) and State Administration of Taxation (SAT) released documents, specifying preferential taxation policies and detailed operation procedures, laying a solid foundation for the implementation of the preferential personal income tax policy for commercial health insurance. The policy will be effective from July 1.

"Ice Breaker" of Personal Income Tax Policy for Commercial Health Insurance

　　Along with rapid market expansion during the recent years, commercial health insurance is becoming increasingly popular among the public. In addition to improving future living standard, it provides sources for income and healthcare expenses in retired life. In addition, the insurance provides an investment and asset management means for additional income. Insurance companies are developing new products to meet the diversified demands of consumers from different classes. One of such new products is the commercial health insurance.

 　　In response to the Opinions of the State Council on Accelerating the Development of the Modern Insurance Industry, SAT, MoF and CIRC jointly released a document in 2015, requesting one city be selected from each province and the 4 municipalities of Beijing, Shanghai, Tianjin and Chongqing for a pilot program of preferential personal income tax policy for commercial health insurance. Commercial health insurance premiums can be deducted from taxable personal income within the maximum amount of RMB2,400/person/year (RMB200/person/month) in the calculation of personal income tax.

 　　According to Li Wanpu, director of SAT Taxation Research Institute, since the kickoff of the pilot preferential tax program a year ago, both public awareness and subscriber number of commercial health insurance have been growing steadily. According to the decision of the State Council, the preferential tax policy will be implemented across the country from July 1. It is generally believed to be an act of great significance. On the one hand, the amount deducted is tax free, instead of a deferred tax. Any insurance compensation received is free of tax, too. In some developed countries, while the insurance premium is free of tax, the amount received as insurance compensation or pension is taxable. In this regard, the Chinese tax policy is more generous. On the other hand, before the introduction of this policy, no tax preference was available for commercial insurance purchasers. Therefore, it is indeed an "ice breaker" in this history of personal income tax policy.

A Series of Actions Taken to Make Sure Tax Payers Get the Full Benefits They are Entitled to

　　According to Deng Yong, director of SAT Income Tax Division, on April 28, MoF, SAT and CIRC jointly issued Notice on Expanding the Scope of Pilot Policy for Personal Income Tax on Commercial Health Insurance Nationwide; on May 23, SAT released Announcement on the Collection of Personal Income Tax on Commercial Health Insurance to Be Promoted; on May 31, SAT held a video conference requesting full implementation of the preferential tax policies, while providing taxation officials across the country with necessary training and making sure that taxation affiliates stand on the same side and use the same standard for the implementation of the policy. In addition, taxation authorities are also requested to take a series of actions, e.g., educating the public on the policy, inspecting its implementation, updating tax returns, preparing business requirements, updating the tax declaration application of the Golden Taxation System (Phase III), and completing necessary statistics and assessment works.

 　　In order to maximize the scope of beneficiaries, the Announcement provides explicit operational procedures from the perspective of tax payers. Hence it provides significant convenience in tax payment by eliminating obstacles in the implementation process.

 　　1) In terms of items eligible for the preferential treatment, it covers all earned incomes as specified by the Tax Law. The purchase of commercial health insurance requires the payment of premiums on an annual or monthly basis. Therefore, tax payers entitled to the preferential treatment shall have continued taxable incomes. In other words, individuals who do not have continued taxable incomes are not entitled to the tax preference. According to the tax policy, tax payers eligible for the preferential treatment include individuals with salaries, or continued compensations for services, or individual business owners, contract-based operator of business enterprises, sole proprietorship investors and individual partners of partnerships.

 　　2) The policy provides explicit definition of "continued compensations for services" to enable convenient operations by both taxation authorities and tax payers. According to the SAT announcement, "individuals with continued compensations for services" are those who earn incomes by providing service to the same employer for more than 3 (including) consecutive months.

 　　3) It expands the scope of the preferential treatment to tax payers eligible for ratified tax rates. Most preferential tax treatments in China are available only to tax payers who pay tax by accounts subject to inspection by taxation authorities. In view of the fact that individual business, sole proprietorships and partnerships pay personal income tax by pre-ratified rates due to their small sizes and less-than-satisfactory accounting system, the Announcement allows these tax payers to share the preferential treatment, too.

 　　4) Tax payers have easy, convenient access to the preferential treatment. Tax payers can access the preferential treatment mainly through two approaches, 1) participating in group insurance purchased by their employers; or 2) buy the insurance as individuals themselves and deliver the insurance policy with "preferential tax treatment ID code" to the finance departments of their respective employers for deduction of taxable income. In the event that an individual purchaser fails to deliver the insurance policy, his/her finance department may deduct all taxable incomes of the previous months one-off to ensure full benefits of the tax preference.

Preferential Tax Treatment ID Code as the Basis for Tax Payer's Eligibility

　　Currently, there are a lot of commercial health insurance products in the market, and not all of them are eligible for preferential tax treatment. Eligibility of commercial health insurance products is designed in accordance with the principles of "primarily to guarantee retired life, with reasonable pricing, income-expense balance, minimum margin and guaranteed principal safety". It effectively lowers the barrier for insurance claims by allowing patients of certain diseases to purchase the insurance, and adding a lot of drugs for major, severe diseases into the insurance coverage. Where no claim is made during the insurance period, part of the premiums paid could be transferred into the personal account of the purchaser for the purchase of commercial health insurance or the payment of self-afforded medical expenses after retirement.

 　　In order to support genuine "good-willed" commercial health insurance products with preferential tax treatment, SAT and CIRC introduced "preferential tax treatment ID code". When an individual purchases a commercial health insurance product through an insurance company, the later exchanges information with the commercial insurance information platform, which generates a preferential tax treatment ID code for each insurance policy purchased by each individual and transmits it to the insurance company to be printed on the insurance policy.

 　　According to Li Ping, researcher of SAT Taxation Research Institute, the "preferential tax treatment ID code" is the primary basis for tax payer's eligibility for tax preference on commercial health insurance. Simply speaking, whether the purchaser of a particular health insurance product is entitled to a tax preference depends on the availability of preferential tax treatment ID code on the insurance policy.

 　　Currently, SAT, along with MoF and CIRC, is studying the management processes and policy designs for tax-deferrable commercial health insurance products, said Deng Yong. In accordance with the overall planning of the State Council, the taxation authorities are conducting studies and making general planning and good preparations for the implementation of a pilot program for tax-deferrable commercial health insurance to support the "Healthy China" initiative.