Chinese authorities have been collecting unpaid taxes from businesses and individuals for decades as the government tries to close huge budget deficits and tackle a growing debt crisis.
More than a dozen Chinese listed companies say they have been awarded millions of dollars in back taxes in a new effort to shore up local finances devastated by a property market downturn that has hit land lease sales, a key source of revenue.
The policy, drawn up after a recent planning meeting of top Communist Party officials, called for expanding local tax revenues and for municipalities to expand their tax administration powers and improve their debt management.
Local government debt is estimated at up to $11 trillion, including what is owed by local government financing entities that are off-balance sheet or not included in official estimates. More than 300 reforms outlined by the party include promises to better monitor and manage local debt, one of the biggest risks in China’s financial system.
That is easier said than done, and experts question the extent to which the party will deliver on its promises to improve the tax system and better balance control over government revenues.
They are not grappling with existing local debt problems, nor with constraints on fiscal capacity, said Logan Wright of the Rhodium Group, an independent research firm. Changing central and local revenue sharing and spending responsibilities is notable, but they have promised to do so before.
The rush to collect taxes that were paid long ago shows how urgent the problems are.
Chinese food and beverage conglomerate VV Food & Beverage said in June it had received a bill of 85 million yuan ($12 million) for taxes dating back 30 years. Zangge Mining, based in western China, said it had received two bills totaling 668 million yuan ($92 million) for taxes dating back 20 years.
Local governments have long been struggling with cash shortages, as the central government controls most of the tax revenues and allocates only a limited amount to local governments, which then pay about 80% of expenditures, such as salaries, social services and investments in infrastructure such as roads and schools.
Pressure has increased as the economy slowed and costs rose due to zero-Covid policies during the pandemic.
Economists have long warned that the situation is unsustainable, saying China needs to increase tax collections to balance its budget in the long run.
Under leader Xi Jinping, the government has cut taxes on personal income, corporate income and value added to drum up support, stimulate economic growth and encourage investment, often in ways that have benefited the wealthy, tax experts say. By most estimates, only about 5% of Chinese pay income tax, far lower than in many other countries. Government statistics show it accounts for just under 9% of total tax revenue, and China has no comprehensive nationwide property tax.
Finance Minister Li Fo’an told the official Xinhua news agency that the latest reforms give local governments more resources and power to collect taxes by adjusting the share of tax they withhold.
The central government doesn’t bear much responsibility for spending and therefore doesn’t feel the pain of tax cuts, said Cui Wei, a professor of Chinese and international tax policy at the University of British Columbia.
The effectiveness of the reforms will depend on how they are implemented, said Cui, who is skeptical that authorities will follow through on a proposal to increase central government spending. That requires more central government staff, and that is an organizational issue, not simply a question of spending, he said.
“I wouldn’t hold my breath for it,” Cui said.
Sudden new tax laws have hit some companies hard, further damaging already shaky business confidence. Ningbo Bohui Chemical Technology, in Zhejiang on China’s east coast, has suspended most production after the local tax bureau demanded 500 million yuan ($69 million) in back taxes on certain chemicals. The company is laying off staff and cutting wages to stay afloat.
Experts say the haphazard way taxes are collected, with periods of leniency followed by sudden tough measures, is counterproductive and discourages businesses from investing or hiring when needed.
If entrepreneurs feel insecure, how can there be more private investment growth in China? said Chen Zhiwu, a finance professor at the University of Hong Kong’s business school. An economic slowdown is inevitable.
The State Taxation Administration has denied launching a nationwide crackdown, which could indicate that enforcement has been lax in the past. Tax authorities have always been strict in preventing and investigating illegal taxation and collecting fees,” the administration said in a statement last month.
As local governments struggle to make ends meet, some are setting up joint operations centers run by local tax offices and police to recover taxes. The AP found that such centers have opened in at least 23 provinces since 2019.
Both individuals and companies are under attack. Dozens of singers, actors and Internet celebrities have been fined millions of dollars in recent years for tax evasion, according to a review of government announcements.
Internet live streamer Huang Wei, better known by her pseudonym Weiya, was fined 1.3 billion yuan ($210 million) in 2021 for tax evasion. She apologized and avoided prosecution by paying up, but her social media accounts were suspended, causing her business to collapse.
The quest for revenue isn’t limited to taxes. In recent years, local authorities have been criticized for levying hefty fines on motorists and street vendors, similar to how cities like Chicago or San Francisco make millions from parking tickets. Despite promises from top officials to abolish fines as a form of revenue collection, the practice persists, with residents complaining that Shanghai police are using drones and traffic cameras to catch drivers using their mobile phones at red lights.
Outside experts and Chinese government advisers agree that structural imbalances between local and central governments need to be addressed. But under Xi, China’s most authoritarian leader in decades, decision-making has become more opaque, leaving businesses and analysts in the dark, while vested interests resist major changes.
They are hermetically sealed, making it difficult for outsiders to know what is happening, says Martin Chorzempa, senior fellow at the Peterson Institute for International Economics.
Beijing has been reluctant to bail out struggling local governments, fearing they would become dependent on bailouts. So the central government has stepped in only in extreme cases, otherwise local governments would have to solve their debt problems on their own.
In Chinese we have a saying: You help people in need, but you don’t help the poor, said Tang Yao, an economist at Peking University. You don’t want them to become dependent on soft money.
Economists say that this time, action may be needed and that the central government has the room to take on more debt, with a debt-to-GDP ratio of just 25%, much lower than in many other major economies.
According to the National Institution for Finance and Development, total non-financial debt is now estimated to be almost three times the size of the economy and is still growing.
This is a huge structural problem that needs a huge structural solution that isn’t coming, said Logan Wright of the Rhodium Group, an independent research firm. There’s really no way around this. And it’s getting worse, not better.
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