China’s mooncake tax

In 2011 China introduced the ‘mooncake tax’ which taxes employees on any employer-provided allowances and benefits. Previously, employee allowances and benefits were tax-deductible to the employer and tax-free to the employees. The mooncake tax’s name originates as the tax applies to all employee allowances/benefits, including gifts of mooncake. China started taxing allowances as it was losing over 680 billion yuan annually in lost taxes.

The Mid-Autumn Festival is the second most important on China’s lunar calendar after the Chinese New Year. The festival is based on the legend of Chang E, the mythical moon fairy who lived in a crystal palace and came out only to dance on the moon’s shadowed surface. Families gather for celebrations on the evening of the new moon, with mooncakes central to the festivities. Companies also celebrate the new moon by giving mooncakes to customers and employees.

Unfortunately, from 2011 employees receiving the mooncakes are taxed on this ‘income’. Employers include the value of the gifted mooncakes in the employee’s monthly income when calculating the amount of tax they should pay. Companies that fail to include mooncakes as part of employees taxable income are fined (three times the amount of the tax avoided).

Of course, employees naturally believe the gifted mooncakes are different from other allowances. Ninety-six per cent of employees say mooncakes are a traditional symbol of gratitude and encouragement to employees in China and shouldn’t be taxed.