China piles pressure on rich people and companies to cough up taxes

Chinese authorities are demanding wealthy individuals and companies double-check their taxes for unpaid liabilities in a move that threatens to further dent investor confidence in the world’s second-largest economy.

Tax officials in recent months have asked wealthy individuals and companies to carry out “self-inspections” of their tax payments and cough up any deficiencies, as local governments hunt for revenue to refill coffers depleted by a property slump.

The tax drive comes as Beijing prepares to announce the details of a large fiscal stimulus this week that is expected to focus on restoring the finances of local governments, many of which are struggling to pay suppliers and employees.

Economists are pinning their hopes on the package, the next phase in a stimulus push that started in September, to help revive household and investor confidence after two years of deflationary pressures driven by the property crisis. Beijing launched the push as economic growth in the third quarter fell short of the official target for this year of 5 per cent.

The tax demands have stirred unease and even “fear” among the country’s wealthy in cities such as Beijing, Shanghai and Shenzhen, a China-based tax partner said.

“Some of them simply didn’t really know what to declare when they were asked to conduct self-inspections,” the partner said. “Many also didn’t realise before . . . [that] their overseas personal gains would be subjected to taxes in China.”

Companies that find nothing wrong during their self-inspections have been told to send in stamped attestations and “retain their evidence for inspection”, according to a notice in one city seen by the Financial Times.

Authorities have also asked individuals to start paying back-taxes, including from their personal overseas investment gains, people familiar with the matter said, in some cases citing a little-used legal provision from 2019.

A lawyer said his wealthy Chinese clients were able to engage in negotiations with tax officials, suggesting there was some “wriggle room” on their potential tax liabilities.

The drive by central and local governments to raise revenue, which also includes a large increase in fines and penalties on the private sector, follows a three-year property slowdown that has hit local authorities’ finances and undermined household and investor confidence.

Government land sales revenue — one of its major revenue sources — dropped almost 25 per cent during the first nine months of this year over the same period the previous year. Nationwide tax revenue fell 5.3 per cent in the same period. China’s total fiscal revenue between January and September this year fell 2.2 per cent compared with the same period last year to about Rmb16.3tn ($2.3tn), official data showed.

“Local governments obviously don’t have money,” said one executive of a medium-sized manufacturing company in Suzhou, one of China’s industrial heartlands near Shanghai. He added that they were frequently hitting companies in his area with heavy fines.

“China’s fiscal deficits have reached a tipping point,” said Gary Ng, a senior economist at Natixis. “There is more urgency to find alternative revenue sources . . . and taxing the wealthy and some companies creates a less direct economic impact on most residents.”

China’s push for “stringent revenue collection” was “pragmatic and necessitated by the prevailing economic winds”, said Kher Sheng Lee, Asia-Pacific co-head of the Alternative Investment Management Association, a hedge fund industry body. “On the flip side, it risks unsettling [business and] investor confidence if the crackdown widens.”

In recent months, there has been a spate of announcements from listed companies about their tax bills.

In October, Hisun Pharmaceutical said it discovered it owed Rmb18mn in taxes and late fees during a “self-inspection”. Beijing-based Allgens Medical in September paid Rmb8mn after its local tax bureau notified it of “tax risk concerns” from prior years to self-inspect. Guizhou Gas’s self-inspection resulted in payment of an extra Rmb20mn in tax.

On top of ordering the self-inspections, local governments have imposed fines on businesses as they try to compensate for the fall in land sales revenue.

Seven out of 16 provinces showed sharp growth in revenue from fines and confiscations last year, with western Chongqing and the capital, Beijing, reporting increases of 22.4 per cent and 21.9 per cent, respectively, according to Chinese media outlet Yicai. Many local governments have stopped publishing fine revenues due to the “abnormal” growth in recent months, local media reported.

“This type of thing — local authorities levying extra fines and taxes on companies — is happening every day and it’s hurting morale,” said an economics professor in Beijing who wished to remain anonymous.

China has a state-level central tax bureau, but local tax officials typically deal with the taxes of individuals and locally registered companies in their respective regions. China’s state tax administration did not respond to a request for comment.

The administration in June said it had not organised any nationwide tax inspections and that it had sent routine notices to some companies to ensure they were properly applying tax policies.

But Beijing has recently implemented new upgrades to its tax surveillance system and is able to better share data across different government departments, financial institutions and tax authorities in a step up of tighter scrutiny and enforcement.

Natixis’s Ng said the tax collection push targeting the rich and private companies “may not be enough”, adding that officials were likely to “eventually consider taxes related to properties [and] broaden the tax base”.

Additional reporting by Sun Yu in New York and Cheng Leng and Gloria Li in Hong Kong