This article was written by Ting Liu(Partner) and Yuanhao Zhang(Associate assistant).
Many companiescompanies fail to pay social insurance premiums in full in accordance with relevant laws. There are two main reasons behind this phenomenon: on the one hand, companies hope to reduce their labor costs; on the other hand, some employees themselves want to pay less social insurance premiums so they can get more net pay. Such practice is illegal. However, due to the trivial consequences of the illegal act, some companies do not pay enough attention to social insurance compliance. However, as the CPC Central Committee published the Plan for Deepening Reform of Party and State Institutions, presenting the plan for reforming the collection and management of social insurance premiums, and as relevant ministries took a series of “major moves in social insurance,” social insurance compliance has become the “Achilles’ Heel” that companies cannot afford to ignore.
Social insurance premiums shall be uniformly collected and audited by the taxation authority, and corporations may face both tax and social insurance audits simultaneously
On 21 March, 2018, the CPC Central Committee announced the Plan for Deepening Reform of Party and State Institutions. Article 46 of the plan provides that “…The basic endowment insurance premiums, the basic medical insurance premiums, the unemployment insurance premiums and other social insurance premiums shall be uniformly collected by the tax department... "Prior to the reform, social security institutions were responsible for checking and reviewing companies’ social insurance declarations, and the taxation authority was only responsible for collecting the premiums. After the reform, the taxation authority shall be responsible for checking key information related to companies’ social insurance declarations, e.g. the number of employees, the amount of employees’ salaries, the base for social insurance payment, and months of payment, which would make it much more convenient for the taxation authority to check companies’ tax compliance and social security compliance in that these information is closely related to information about companies’ tax payment.
Since the taxation authority is now responsible for reviewing both tax and social security issues, a company’s failure to comply in either aspect could lead to an overall audit of both aspects by the taxation authority. In other words, companies are much more likely to be audited due to failure in social security compliance.
Responsible persons of companies that did not pay social insurance premiums in full may face disciplinary measures
The National Development and Reform Commission (hereinafter referred to as “NDRC”), together with several government agencies including the Civil Aviation Administration of China and the China Railway Corporation, issued “Opinions on Appropriately Restricting Particular Seriously Dishonest Persons from Traveling by Aircraft within a Certain Period and Boosting the Building of the Social Credit System” and "Opinions on Appropriately Restricting Particular Seriously Dishonest Persons from Traveling by Train within a Certain Period and Boosting the Building of the Social Credit System" on 2 March, 2018. Article 384 and Article 385 have made it clear that employers’ failure to pay social insurance premiums in full would constitute a seriously dishonest behavior, which means that the responsible person may be deemed a seriously dishonest person when corporations don’t pay social insurance pursuant to the law, and their travelling by train or plane will be restricted .
According to Article 384 and Article 385, serious dishonest behaviors on social insurance are as follows: an employer fails to participate in social insurance and refuses to take corrective actions under relevant provisions; an employer fails to report social insurance premiums base in good faith and refuses to take corrective actions; Any violation case wherein a party is under the liability to pay social insurance premiums and is capable of payment but refuses to pay; social insurance funds are concealed, transferred, embezzled, misappropriated or invested and operated in violation of relevant provisions; social insurance benefits are acquired by fraud, fabricating supporting documents, or any other means; a social insurance service institution breaches the service agreement or relevant provisions; refusal to assist the social insurance administrative department in conducting investigations and verifications of accidents and problems.
Continuing to reduce the social insurance premium rates - law enforcement tends to be stricter
Social insurance costs are one of the major costs of companies. In order to further reduce the burdens of companies and strengthen their vitality, the Ministry of Human Resources and Social Security and the Ministry of Finance jointly released “Notice on Continuing to Reduce Social Insurance Premium Rates Periodically” on 20 April, 2018, which will come into effect on 1 May , 2018. According to the notice, local governments shall make specific plans to reduce the social insurance premium rates.
If the plan to reduce social insurance premium rates is implemented, the burden on corporations to pay social insurance premiums will be reduced accordingly, which means that corporations’ ability to pay will increase and it will be more difficult to obtain sympathy and understanding from the law enforcement department by blaming high labor costs. In other words, law enforcement will become stricter.
It’s never too late to do it— Corporations should pay social insurance premiums in accordance with the law, and companies in Guangdong can suspend payment of overdue fines.
Corporations that fail to pay social insurance premiums in full under the law shall pay the outstanding payment of social insurance premiums in accordance with the law to avoid and control compliance risks. Local stipulations on the supplementary payment of social insurance vary from each other.
In order to properly solve the historical issues of social insurance payment, the Taxation Bureau of Guangdong Province and the Human Resources and Social Security Bureau of Guangdong Province issued and implemented the “Notice regarding the Opinions on Handling Overdue Fines of Employees’ Social Security Premiums Arrearage in Guangdong Province” (hereinafter as "the Notice") on 16 April, 2018, stipulating the policies on employers’ supplementary payment of social insurance premiums, the highlights of which are as follows:
(a) All social insurance payments due in the period before and after 1 July, 2011 can be paid retroactively.
According to the Notice, employers are allowed to pay social insurance premiums incurred before and after the implementation of the Social Security Law on 1 July, 2011. The only difference lies in whether the payment of overdue fines can be delayed. There was no special restriction on the period of overdue payments of social insurance in Guangzhou, but companies in Shenzhen could only pay social insurance premiums incurred within the past two years. The Notice removed limits on the period of social insurance premiums allowed to be paid.
(b) There are no special restrictions on the type of social insurance the premiums of which can be paid retroactively.
In Shenzhen, social insurance premiums eligible for retroactive payment are limited to endowment insurance and medical insurance, while the Notice set no limitation in this regard, which is similar to the policies of Guangzhou.
(c) Corporations can suspend paying overdue fines under certain conditions
According to the Notice, if the social insurance premiums should be paid is incurred prior to the implementation of the Social Insurance Law on 1 July, 2011) and the overdue fines are incurred after the implementation of the Social Insurance Law, payment of such overdue fines may be postponed. And if the social security premiums should be paid is incurred after 1 July, 2011 and if arrearage is incurred due to liquidation or disposal of zombie corporations or the reform of the social insurance system, such overdue fines may be postponed upon the approval of local tax authorities at or above the county level. Influence of the social insurance system reform policies mainly includes deficits in premiums arising from reform or cancellation of state-owned enterprises, collectively-owned enterprises, and public institutions.
It is important to note that the validity period of the notice is five years, which means corporations only have a time window of five years to to make up for the deficits in premiums. The amount of overdue fines shall not exceed the amount of arrears in social insurance premiums. The Notice gives room and buffer time for corporations to ensure social insurance compliance. So far, neither Shenzhen nor other regions in Guangdong province has formulated new plans for retroactive payments of social insurance premiums based on the Notice.