I just did this, so I'll fill you in. If you're a resident of the US, Britian, Australia, or NZ, and you're teaching at a university in China, you're eligible for 2-3 years of no Chinese taxes, depending on the country you're from, provided that this is your first time working in China.
Your school has to file the paperwork to get you tax exempt status, but you need to get a certificate of (something or the other) from your government, which basically says you're a tax resident of that country. It cost me $80 and took 2-3 months for me to get mine from the US government. You give this to the school, they get you approved through the provincial government, and boom, no taxes. Mine just finished, and they've filed some paperwork to get the last 3 months worth of taxes reimbursed.
There is some strange clause though, and I don't understand this. If you stay *more* than 3 (or 2) years, you have to pay back taxes for the previous 3 years. I think the key is that it's supposed to be *temporary* employment, and if you stay more than the alloted time, you aren't eligible, and thus you owe the tax you were exempted from. In my case, the university will pay these back taxes for me at the end of three years, provided I sign another contract with them.
Anyway, that's how it works.