2026 China Individual Income Tax Withholding Syste...

Key Updates

SAP has released two-phase solutions for the 2026 China Individual Income Tax (IIT) withholding system updates:

Phase 1 (SAP Note 3710991): Manual operation approach
Phase 2 (SAP Note 3746570): Hybrid approach combining automatic calculation with manual configuration

If your organization has frequent employee turnover, numerous back pay scenarios for terminated employees, or wants to reduce manual maintenance efforts, Phase 2's automatic calculation approach will significantly improve efficiency.

1. Regulatory Changes Explained

1.1 Cumulative Basic Deduction Calculation Rule Optimization
Before the change:
The system automatically calculated cumulative basic deduction based on employee hiring month and tax period.

After the change:
Cumulative Basic Deduction = Current Period Basic Deduction + Prior Period Cumulative Basic Deduction

Business impact:
This change means employees must file continuously in the Golden Tax System to accumulate multi-period basic deductions. If filing is interrupted for any month (e.g., no salary paid), the system cannot accumulate previous basic deductions and must restart calculation from the current month.

1.2 New Special Additional Deduction Rules
When all three conditions are met simultaneously:

Termination date month < Tax period month
“Back pay after termination” is “Yes”
Back pay tax period month = Tax period month

The system treats the “back pay tax period month” as the “termination date” to calculate special additional deduction amounts.

SAP Standard Solution Support:
SAP's /4K* series wage types already support Year-to-Date (YTD) amount storage, meeting the new regulatory requirements.

2. Business Scenario Analysis

Scenario 1: Continuous Filing Employees

Regular monthly salary payments
Continuous filing in Golden Tax System
Can accumulate multi-period basic deductions

Scenario 2: Discontinuous Filing Employees

No salary paid in certain months (e.g., leave, unpaid leave)
Filing interrupted in Golden Tax System
Can only accumulate current period basic deduction; previous accumulation resets

Scenario 3: Terminated Employee Back Pay

Employee already terminated, subsequent back pay for previous months
Requires special handling of special additional deductions
Needs separate filing for different months

Scenario 4: Rehired Employees

Employee terminated and rehired
Requires cumulation reset
Needs correct tax entry date setup

3. Solution Details for Phase 2

3.1 Phase 2 Solution Provides Two Options
Option 1: Manual Operation Approach (Inherited from Phase 1)

Maintain tax entry date via IT0531
Maintain TXEYD parameter via IT0041 + Feature 28TDR
Complete manual control of each employee's calculation logic

Option 2: Automatic Calculation Approach

System automatically checks prior period payroll results
Automatically determines continuous filing status
Automatically calculates basic deduction
Automatically handles cumulation reset
Can still be manually overridden via IT0531/IT0041

3.2 Recommended Principle:

Prioritize Phase 2 automatic calculation to reduce 90% of manual maintenance work
Retain flexibility – automatic calculation can still be overridden via IT0531/IT0041
Phased implementation – first enable TACM parameter, test, then enable automatic calculation

4. Implementation Guide for Phase 2 Solution

4.1 Parameter Configuration
4.1.1 V_T596C View Configuration
Parameter Name: TACM
Function: Enable new cumulative basic deduction calculation logic
Configuration Steps:

Transaction code: SM30
View name: V_T596C
Find TACM parameter
Set effective date (recommended to start from a month where payroll has not been run)

Important Note: Once TACM parameter is enabled, it affects all employees' calculation logic. Recommend full validation in test system first.

4.1.2 Feature 28TCE Configuration
Feature 28TCE controls two switches:
Switch 1: Automatic Calculation Switch
Return Value Description Recommendation

AX	Enable automatic calculation (default)	Recommended
A	Disable automatic calculation	Only for special scenarios
Not set	Equivalent to disabled	Not recommended

Function: System automatically checks prior period payroll results, determines continuous filing status, automatically calculates basic deduction, and automatically handles cumulation reset.

Switch 2: Zero Filing Switch
Return Value Description Recommendation

ZX	Enable zero filing	Use for specific scenarios
Z	Disable zero filing (default)	Recommended
Not set	Equivalent to disabled	Recommended

4.2 Calculation Logic Details
4.2.1 Basic Deduction Calculation Formula
Basic Deduction = [ min(Tax Period Month, Termination Month) – max(Hiring Month, Tax Year January) + 1 ] × 5,000

4.2.2 Hiring Month Priority
Original Approach (Phase 1):

IT0531 tax entry date (manual)
Feature 28TDR parameter TXEYD + IT0041 record (manual)
BADI: HRPAD00_ENTRY_LEAVE (automatic)
Feature ENTRY parameter + IT0000/0001/0016/0041 records (automatic/manual)

New Approach (Phase 2 with automatic calculation enabled):

IT0531 tax entry date (manual)
Key requirement: IT0531 record must start from the current payroll period
– Example: When running March payroll, IT0531 must start from 03/01/2026
– Feature 28TDR parameter TXEYD + IT0041 record (manual)
System automatic setting (automatic) – NEW
– Discontinuous filing: tax entry date = current month start
– Continuous filing: continue checking priority 4, 5
BADI: HRPAD00_ENTRY_LEAVE (automatic)
Feature ENTRY parameter + related infotype records (automatic/manual)

Key Change: Phase 2 adds “system automatic determination” logic at priority 3, which is the core of automatic calculation implementation.

4.2.3 Termination Month Priority
Original Approach (Phase 1):

IT0531 tax termination date (manual)
BADI: HRPAD00_ENTRY_LEAVE (automatic)
Feature LEAVE parameter + IT0000/0001 records (automatic)

New Approach (Phase 2):

IT0531 tax termination date (manual)
– When automatic calculation is enabled, IT0531 must also start from current period
If no priority 1 value exists, no termination month is generated
– This means termination month is primarily controlled through manual IT0531 maintenance

4.2.4 Cumulation Reset Priority
Original Approach (Phase 1):

IT0531 cumulation reset checkbox (manual, must start from current period)
IT0531 tax group change (manual)

New Approach (Phase 2):

IT0531 cumulation reset checkbox (manual, must start from current period)
IT0531 tax group change (manual)
NEW: System automatically determines discontinuous filing and resets (automatic)

Key Change: Phase 2 adds “system automatic determination of discontinuous filing” logic at priority 3, automatically handling cumulation reset.

4.3 Automatic Calculation Logic Details
4.3.1 Zero Filing Switch Determination
Switch Status: Enabled (ZX)

System behavior: Directly determines employee as continuous filing
Cumulation rule: Includes prior period + current period
Applicable scenario: Enterprises adopting full filing principle, filing even when no salary is paid

Switch Status: Disabled (Z or not set) – Recommended

System behavior: Checks prior period payroll result status
Cumulation rule: Determined based on actual filing status
Applicable scenario: Standard scenario for most enterprises

4.3.2 Prior Period Payroll Result Status Determination
System determines filing status by checking prior period payroll run type:
Run Type Determination Condition Filing Status

Regular Run	In Period = For Period	Filed
Retro Run	In Period ≠ For Period	Not Filed
Off-cycle Run	Payment Date within prior month Payroll Period	Filed
Correction Run	Non-BB record and For Period within prior month Payroll Period	Filed

4.3.3 Impact of Continuous vs Discontinuous Filing
Cumulation Item Continuous Filing Discontinuous Filing

Basic Deduction (new rule)	Accumulate multi-period	Current period only
Special Additional Deduction (termination back pay new rule)	Accumulate multi-period	Accumulate multi-period

Key Understanding:

Basic deduction is affected by continuous filing
Special additional deduction is NOT affected by continuous filing (due to YTD storage in /4K* series wage types)

5. Typical Scenario Examples

Scenario 1: Active Employee with Continuous Filing
Background:

Employee A, hired January 2025
Regular monthly salary payments
Phase 2 solution enabled January 2026

Configuration:

TACM parameter: Enabled (from January 2026)
Feature 28TCE: AX (automatic calculation enabled)
IT0531: No special maintenance needed

System Behavior:
Month Payroll Result System Determination Basic Deduction

2026-01	Regular Run	Continuous filing	5,000
2026-02	Regular Run	Continuous filing	10,000 (5,000 + 5,000)
2026-03	Regular Run	Continuous filing	15,000 (10,000 + 5,000)

Result: System automatically accumulates, no manual maintenance needed

Scenario 2: Employee with No Salary in Certain Month (Discontinuous Filing)
Background:

Employee B, hired January 2025
No salary paid in February 2026 due to leave
Salary payment resumed March 2026

Configuration:

TACM parameter: Enabled
Feature 28TCE: AX (automatic calculation enabled)
IT0531: No special maintenance needed

System Behavior:
Month Payroll Result System Determination Basic Deduction

2026-01	Regular Run	Continuous filing	5,000
2026-02	No Payroll Run	—	—
2026-03	Regular Run	Discontinuous filing (detected no prior result)	5,000 (reset, current period only)
2026-04	Regular Run	Continuous filing	10,000 (5,000 + 5,000)

Result: System automatically detects interruption and resets, March restarts from 5,000

Scenario 3: Terminated Employee Back Pay
Background:

Employee C, terminated January 31, 2026
Back pay for December 2025 year-end bonus in March 2026

Configuration:

TACM parameter: Enabled
Feature 28TCE: AX (automatic calculation enabled)
IT0531: Requires manual maintenance of tax termination date and tax entry date

Operation Steps:

Maintain IT0531 record
– Delimit date: 12/31/2025
– Tax Entry Date: 12/01/2025
– Tax Termination Date: 12/31/2025
Run March 2026 payroll
– System recognizes as back pay after termination
– Special additional deduction calculated based on December 2025
Golden Tax System filing
– “Back pay after termination”: Select “Yes”
– “Back pay tax period month”: 2025-12

Result: Correctly handles termination back pay scenario, special additional deduction calculated based on back pay month

Scenario 4: Rehired Employee
Background:

Employee D, terminated June 30, 2025
Rehired March 1, 2026

Configuration:

TACM parameter: Enabled
Feature 28TCE: AX (automatic calculation enabled)
IT0531: Requires manual maintenance of new tax entry date

Operation Steps:

Maintain IT0531 record (before running March 2026 payroll)
– Create new record, start date: 03/01/2026
– Tax Entry Date: 03/01/2026
– Do not check Cumulation Reset (system will automatically reset)
Run March 2026 payroll
– System detects new tax entry date
– Automatically resets cumulation, starts calculation from March

System Behavior:
Month Payroll Result System Determination Basic Deduction

2026-03	Regular Run	New hire (automatic reset)	5,000
2026-04	Regular Run	Continuous filing	10,000 (5,000 + 5,000)

Result: System automatically recognizes rehire and resets cumulation

6. Implementation Recommendations

✅Recommended Practices

Prioritize automatic calculation (Option 2)
Can still override results via IT0531/IT0041 under automatic calculation
Tax Termination Date primarily maintained manually via IT0531
Flexible configuration based on calculation formula and switch status

⚠️Important Notes

IT0531 records must start from current payroll period (when automatic calculation is enabled)
TACM parameter affects all employees once enabled
Recommend full validation in test system first
Zero filing switch (ZX) only for specific scenarios

❌Common Mistakes

IT0531 record dates incorrect (not starting from current period)
Forgetting to configure Feature 28TCE
Enabling directly in production system without testing
Confusing continuous filing with zero filing concepts

7. Frequently Asked Questions

Q1: Can Phase 1 and Phase 2 coexist?
Answer: No. Once TACM parameter is enabled, all employees will use the new calculation logic. However, Phase 2 includes all manual operation functions from Phase 1, so Phase 2 is an enhanced version of Phase 1.

Q2: Can I use automatic calculation for some employees and manual maintenance for others?
Answer: Yes. After enabling TACM + Feature 28TCE (AX), system defaults to automatic calculation. For employees requiring manual control, maintain IT0531 tax entry date to override automatic calculation results (higher priority).

Q3: When should I use the zero filing switch (ZX)?
Answer: Only when your enterprise adopts “full filing” principle, meaning filing in Golden Tax System even when no salary is paid. For most enterprises, recommend disabling this switch (default value Z) and letting the system determine based on actual payroll results.

Q4: What happens if employee filing is interrupted in Golden Tax System but salary is paid continuously in SAP?
Answer: If using Phase 2 automatic calculation, system will detect continuous payroll results and determine as “continuous filing”, accumulating multi-period basic deductions. However, this may be inconsistent with actual Golden Tax System filing status. Recommendations:

If filing is actually interrupted in Golden Tax System, manually maintain IT0531 tax entry date to reset cumulation
Or ensure through business process that SAP salary payment remains consistent with Golden Tax filing

Q5: Do I still need to maintain IT0531 tax entry date and tax termination date in Phase 2?
Answer:

Automatic calculation scenarios: Most cases don't require maintenance, system handles automatically
Scenarios requiring manual maintenance:
– Terminated employee back pay (need to set tax termination date)
– Rehired employees (need to set new tax entry date)
– Special adjustment scenarios (override automatic calculation results)

Q6: If we're already using Phase 1, how do we upgrade to Phase 2?
Answer:

Apply SAP Note 3746570 in test system
Configure Feature 28TCE (AX) to enable automatic calculation
Full testing in test system
Apply to production system after validation

Resources and Support
For more detailed information about regulatory changes released by SAP Globalization, and further collaboration and support on Greater China HCM localization, please visit the links provided below:

Disclaimer
SAP is not a law firm and is not able to provide any legal advice.
This blog, or any related comment, SAP's strategy and possible future developments, products and or platforms directions and functionality are all subject to change and may be changed at any time for any reason without notice.
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