Chinese authorities are instructing affluent individuals and corporations to reassess their taxes for any unpaid obligations, a measure that may further impact investor confidence in the nation’s economy. Recently, tax officials have requested these individuals and companies to perform “self-inspections” of their tax payments and address any discrepancies, as local governments seek to replenish coffers strained by a downturn in the property market.
This tax initiative coincides with Beijing’s upcoming announcement of a significant fiscal stimulus package, expected to focus on stabilizing the finances of local governments. Many of these governments are facing challenges in paying suppliers and employees. Economists hope this stimulus, part of an ongoing effort initiated in September, will help boost confidence among households and investors after two years of deflationary pressures caused by the property crisis. This economic push follows subpar growth in the third quarter, falling short of the 5 percent target set for the year.
The tax demands have caused unease and even “fear” among the wealthy in cities like Beijing, Shanghai, and Shenzhen, according to a China-based tax partner. Some were reportedly unaware of what they had to declare in the self-inspections and did not realize their overseas personal gains were taxable in China.
Companies conducting self-inspections without issues are required to submit stamped attestations and retain evidence for possible future inspection, as outlined in a city notice. Individuals are also being asked to pay back-taxes on personal overseas investment gains, utilizing a legal provision from 2019, sources familiar with the situation indicated. One lawyer mentioned that wealthy Chinese clients have been negotiating with tax officials, indicating some flexibility in their tax liabilities.
The joint effort by central and local governments to increase revenue, which includes imposing more fines and penalties on the private sector, comes after a three-year property downturn that strained local finances and affected household and investor confidence. Revenue from government land sales, a key income source, declined by nearly 25 percent in the first nine months of the year compared to the previous year. During the same period, nationwide tax revenue fell by 5.3 percent. China’s overall fiscal revenue from January to September decreased by 2.2 percent compared to the same period last year, totaling approximately Rmb16.3 trillion ($2.3 trillion).
An executive from a medium-sized manufacturing company in Suzhou noted that local governments clearly lack funds, as evidenced by frequent heavy fines imposed on companies in the area. Gary Ng, a senior economist at Natixis, remarked that China’s fiscal deficits have reached a critical point, necessitating the exploration of alternative revenue sources. Taxing the wealthy and certain companies, he suggests, has less direct economic impact on most residents.
Kher Sheng Lee, Asia-Pacific co-head of the Alternative Investment Management Association, noted that China’s strict revenue collection approach is pragmatic given the current economic climate, but it has the potential to disrupt business and investor confidence if expanded.
Several listed companies have recently announced their tax obligations. Hisun Pharmaceutical revealed in October that it owed Rmb18 million in taxes and late fees after a “self-inspection.” Additionally, Allgens Medical paid Rmb8 million in September following a notification of “tax risk concerns,” while Guizhou Gas’s review resulted in an extra Rmb20 million tax payment.
Beyond self-inspections, local governments are imposing fines on businesses to offset declines in land sales revenue. Seven out of 16 provinces saw significant increases in revenue from fines and confiscations last year, with Chongqing and Beijing reporting 22.4 percent and 21.9 percent increases, respectively. Some local governments have stopped publishing fine revenues due to “abnormal” growth, according to local media.
An economics professor in Beijing, who wished to remain anonymous, mentioned that added fines and taxes from local authorities are becoming widespread and adversely affecting morale. Although China has a central state tax bureau, local officials typically handle individual and locally-registered company taxes in their areas. The national tax administration, which stated in June that it did not organize any nationwide tax inspections, declined to comment further.
Recent enhancements to Beijing’s tax surveillance system have improved data sharing among government departments, financial institutions, and tax authorities, increasing oversight and enforcement. Natixis’s Ng expressed doubt that the current tax collection efforts targeting the wealthy and private companies will suffice, suggesting that property-related taxes and a broadened tax base may be considered in the future.
