In the midst of economic recession and a stagnant real estate market, the Chinese Communist Party (CCP) is urgently seeking to fill its financial gaps by initiating a campaign to increase taxes on private enterprises and the wealthy. This move could further weaken the confidence of businesses and investors, potentially leading to the eruption of concentrated conflicts.
Recently, many mainland Chinese companies and wealthy individuals have felt the intensified scrutiny from the CCP’s tax authorities regarding back taxes and tax evasion, even resorting to using legal clauses that were rarely enforced in the past.
According to reports by the Financial Times, in the past few months, tax officials in China have been demanding that wealthy individuals and companies conduct self-audits of their tax situations and make any necessary tax payments. This has caused unease and even fear among Chinese wealthy individuals in cities like Beijing, Shanghai, and Shenzhen, with some not knowing what they are required to declare and being unaware of the taxation of overseas personal income in China.
Furthermore, investors engaged in trading U.S. stocks have suddenly received text messages from the tax authorities reminding them about unreported overseas income.
Bloomberg reports that the targets of this campaign are individuals with at least $10 million in overseas assets, as well as shareholders of Hong Kong and U.S.-listed companies.
This initiative by the authorities references the implementation of the “Common Reporting Standard” introduced in 2018, a global system aimed at preventing tax evasion. Although local regulations have always stipulated that residents must pay taxes on global income (including investment returns), this particular legal provision was seldom enforced.
In fact, in recent years, with many provinces and cities facing financial difficulties, many individuals and companies have gradually become targets of such enforcement actions.
Since mid-June, many companies in mainland China have received notices to pay back taxes. For instance, VeVe Holdings was required to repay accumulated taxes of 85 million yuan for the period between 1994 and 2009, and Ningbo Bohui Chemical Industry was asked to pay 500 million yuan in taxes earlier this March. These cases have sparked discussions about retrospective tax audits going back 30 years.
In order to boost local government revenues, there have been frequent reports of police engaging in targeted law enforcement, imposing heavy fines on drivers and street vendors. Moreover, in the past year, numerous singers, actors, and internet celebrities in China have faced substantial fines for tax evasion.
According to reports from China Business News, the fines and confiscation of income in 7 out of 16 provinces increased significantly in 2023, with Chongqing and Beijing experiencing growth rates of 22.4% and 21.9%, respectively. Many local governments have ceased publishing records of fines imposed.
Some local governments have also established “Joint Tax Enforcement Centers” to pursue tax arrears. Since 2019, at least 23 provinces have set up centers of this kind.
Since 2023, many privately-owned companies in Guangdong have experienced enforcement actions by public security authorities from central provinces, resulting in frozen accounts and property confiscation, a practice referred to as “deep ocean fishing.”
A businessman from a southern province in China told The Epoch Times that currently, local governments are heavily indebted and unable to pay wages. “An employee from a government agency we service told me that since October of last year, they have only received wages intermittently, unable to pay consistently. The government is really out of funds.”
“We provide services to some 4S car dealerships. Seeing the trucks meant for cargo delivery almost always parked in the lot with little business, struggling to the brink of bankruptcy. As for real estate companies, most have ceased operations without declaring bankruptcy, laying off employees, leaving just one person in the office,” he added.
He expressed how the majority of boasting about high incomes and extravagant living featured in Chinese media and television is now a thing of the past, with many now facing financial difficulties and starting to vocalize their grievances.
“In such circumstances, local governments are empowering police stations to fine people, using the collected fines to pay wages, a practice known as deep sea fishing. They start with targeting big taxpayers. Even if you have offshore operations, but still do business domestically, they can involve your parents to pressure you for money. Small businesses have no margin like that,” he explained.
A Taiwanese entrepreneur shared that local governments in China have long been exploiting businesses for revenue. For example, when a particular region fails to achieve the central government’s set GDP target, they would often make up the shortfall by selling land.
He pointed out that in recent years, with the expansion of fiscal deficits, including granting more financial autonomy to local governments by the CCP, retrospective taxation has become more prevalent. Local governments possess revenue data from businesses operating in the area, and they would approach profitable business owners for discussions on how to bridge the fiscal gap for the year.
The entrepreneur highlighted that wealthy business people in Zhejiang Province have encountered situations where they were lured with favorable land and investment policies by some central Chinese provinces in recent years to attract factories from coastal regions. However, after a period of time, various pretexts like tax evasion and fraud inspections were used, causing immense challenges for the factories to remain operational and leading some to return to their hometowns with no profit.
“The Chinese government did not tax overseas income previously, indicating a decrease in tax revenue now, prompting them to seek alternative financial sources,” he stated.
The CCP’s “zeroing out” policy has depleted local finances and medical insurance, exacerbated by a collapsing real estate market. Since 2021, the decline in revenue from land sales has accelerated. In 2022, total land revenue dropped by 2 trillion yuan, followed by a further decrease of 1.4 trillion yuan in 2023.
Amid decreasing revenues from land sales, local governments have increasingly targeted private enterprises, intensifying the anxiety of already stressed privately-owned businesses by imposing fines for tax evasion, bribery, fraud, and violations of product safety regulations.
The two main revenue sources for local governments are value-added tax and corporate income tax, as the CCP aims to prevent the Chinese population from developing a Western-style concept of “taxpayer”. Instead of directly taxing citizens, the emphasis is primarily on taxing enterprises which has led to exceedingly high tax rates on Chinese businesses, often termed as the “tax rate of death.”
A former tax official from a tax bureau in mainland China shared that the tax burden on Chinese enterprises is relatively heavy, with value-added tax coupled with corporate income tax, property tax, and special commodities such as cigarettes, alcohol, gasoline, and automobiles being subject to consumption tax, which has increased tax rates even further.
He mentioned that under these heavy tax burdens, achieving profits for businesses becomes incredibly challenging, leading them to try minimizing tax liabilities. In reality, tax authorities are well aware and can easily find tax evasion issues if they were to investigate. In the past, the government would issue annual targets to tax bureaus, where completion was the key goal, fostering a symbiotic relationship between the authorities and enterprises, including exchanging favors, bribes, and willful ignorance, allowing tax escapes.
He added that in the current economic climate where the government faces financial constraints due to the diminishing importance of land revenues, local authorities are pressuring the tax bureau to collect from corporations. The previous quid pro quo relationship has been disrupted, now prompting a retrospective collection of tax liabilities. In this scenario, tax officials may cite tax laws, indicating that a company was previously involved in tax evasion, which can result in fines increased by 50% to five times the original amount. However, due to past amicable relations, they might forgo the fines, only requiring the payment of owed taxes, and even waive trust funds.
“With pressure mounting on businesses, they are compelled to comply as the interpretation of laws lies with the CCP, leaving them with no room for choice,” he continued. Tax authorities entirely comprehend the details of enterprises and understand that the longer they delve into past tax obligations, the more fruitful the collection would be. The longer the period, the more taxes are expected to be recovered, given the gaping shortfall in tax revenues currently, unless extended recovery periods are implemented, immediate payments may not suffice to bridge the deficit.
He expressed that at the core of this issue lies the CCP system, which does not require consensus from the public, inevitably leading to panic within the business sector. By squeezing state-owned enterprises, the CCP ends up squeezing itself. Despite its rhetoric on promoting common prosperity and targeting wealthy businesspeople and entrepreneurs, the benefits do not trickle down to the general populace.
Regarding the Chinese system, he emphasized that it is oppressive and sustains itself by exploiting the destitution of a majority of the populace to fuel its extravagant lifestyle. Hence, when economic troubles arise, the instinct of the CCP is not to focus on economic recovery but rather to salvage its finances by extracting money from the pockets of the common people.
“The consequence is that many individuals are reluctant to engage in business, attempting to alleviate immediate issues but eventually harming long-term benefits. However, at present, such considerations seem to be overlooked,” he emphasized.
He cautioned that this trend of bleeding businesses dry is anticipated to worsen, resulting in a vicious cycle. Many enterprises may not withstand the pressure, ultimately leading to a decline in lawful tax collections.
“There is an increasing trend of numerous Chinese companies shifting operations to Southeast Asia, comprising not only Chinese investments but also Taiwanese and foreign capitals. People are becoming increasingly aware that China’s future growth may not replicate the remarkable developments of the past two decades, and their assets might be at risk, taking into account it is among the few remaining communist societies globally,” he accentuated.
He asserted that if the trade war continues under the leadership of Donald Trump, the Chinese economy is bound to deteriorate further. If there are no signs of economic recovery in China within the next 2 to 3 years, the domestic assets of overseas Chinese wealthy individuals are at significant risk, and the CCP might attempt to confiscate them under various pretexts.
He hypothesized that the CCP annually spends exorbitant sums on maintaining stability, and if the fiscal deficit accumulates further, affecting the stability maintenance budget, security personnel from public security, national security, and national defense units would be deprived of salaries. This scenario could lead to discontent and potential disruptions.
Reflecting on the situation, the businessman highlighted a Chinese proverb, “Poverty and frugality brings a hundred sorrows to a couple.” When the economy falters, all underlying conflicts will surface, and the CCP will certainly fail on the economic front. The fundamental flaw in its system lies within the economic realm.
He concluded that comparing the present conditions to the past, like the eras of North Korea and Mao Zedong, where poverty did not incite significant issues, is erroneous. People have now experienced the sunlight outside and a better life, making them unwilling to revert to their previous dire circumstances.
In contemplating the scenario post-Trump’s administration, should the trade war persist and stifle economic and technological advancements, there is a possibility of a brittle break in the CCP. Just like bending a piece of wood through constant pressure until it suddenly snaps, the implication is significant.