China’s economy continues to struggle, with unemployment skyrocketing year after year, especially as the real estate crisis continues to devastate local Communist Party governments financially. Faced with financial difficulties, local authorities have been increasing taxes on China’s wealthy elite and even forming specialized teams to target individual billionaires, implementing a “grass-cutting” operation on the rich.
In January this year, Hu Jinglin, the Party Secretary and Director of the State Administration of Taxation of the Communist Party of China, announced during an annual meeting in Beijing, after elaborately expounding on Xi Jinping Thought, socialism with Chinese characteristics, and the spirit of the 20th Party Congress, the launch of a massive tax collection operation amounting to a staggering 21 trillion US dollars.
Following this, tax departments across China started working overtime to increase tax revenues from top billionaires and super large corporations, restructuring offshore trust taxation rules, initiating the largest-ever crackdown on local businesses owing taxes, aiming the scythe at the enormous wealth of over 1.7 trillion US dollars held by Chinese individuals in Hong Kong.
According to sources familiar with the matter who spoke to Bloomberg, the Chinese tax authorities have also established a series of special teams dedicated to retrieving outstanding taxes, some of which are specifically targeting individual billionaires. These special teams consist of local city or provincial officials, tax experts, and regulatory personnel.
Bloomberg’s latest analysis article points out that since China joined the World Trade Organization in December 2001, the average income of Chinese residents has increased from just over $1,000 to more than $14,000 today, with thousands of billionaires emerging in the country. These individuals, after amassing wealth, have begun to participate extensively in European art auctions, feverishly purchasing luxury homes in London, and investing heavily in the US capital markets.
However, as time has passed, the good days of the wealthy are coming to an end. A new regulation by the Communist Party stipulates that Chinese super-rich individuals with offshore assets must settle their overseas trust-related taxes by the end of October or face substantial fines.
To avoid hefty fines, the super-rich are diligently calculating how much tax they owe and finding ways to raise funds for payment. Some Chinese citizens are concerned that the Communist Party may impose an exit tax on those moving abroad, hastening their citizenship process.
Furthermore, there are individuals selling stocks or taking out significant overseas loans to cover their tax bills. For instance, after suddenly receiving a substantial tax bill, Shu Ping, co-founder of Haidilao, sold around $350 million in company stocks through a family trust.
Moreover, some wealthy individuals, upon receiving tax bills, have started to push back. Some are negotiating with the tax authorities in hopes of reducing their tax dues, while others believe it is unfair or unaffordable and are considering legal action.
In addition, some entrepreneurs are negotiating with local governments by threatening to relocate their businesses. For example, after a company based in Guangzhou was assessed a tax payment of 100 million RMB, the controlling shareholder threatened to relocate the business to Shanghai, ultimately forcing local officials to reduce the tax amount to 5 million RMB.
It’s been reported that another wealthy family believes banks like JPMorgan Chase and UBS are too conspicuous, so they have requested their advisors to find a smaller bank, preferably one that Communist officials are unfamiliar with, to store their funds.
In an effort to outpace the United States in artificial intelligence development, the Communist Party plans to invest nearly $300 billion in building data centers over the next five years, putting immense pressure on local government finances to find ways to raise money, considering any money is better than none.
In early August, a businessman from Guangdong received a tax bill of 9 million RMB for overseas stock trading income from the tax authorities. He hired lawyers to access his trading account information, hoping to re-calculate each transaction and compare the results with the tax authority’s calculations to potentially reduce the tax amount. Many other entrepreneurs have also received supplementary tax bills, some with clear amounts and some without, requiring them to estimate the additional tax amounts themselves.
Some experts believe that to fill the fiscal deficit, the Communist Party may even introduce an inheritance tax. For decades, the Chinese tax authorities have maintained a more lenient attitude, requiring capital gains tax for offshore stock trading but with few actually paying it.
Christine Wong, a senior researcher at the East Asia Institute of the National University of Singapore, noted that in the past, the Chinese tax authorities focused more on meeting revenue targets without much concern for tax law enforcement. However, times have changed, and now the Communist Party is genuinely in need of money.
Official figures from the Communist Party indicate that central and local governments spent $1.9 trillion more than they earned last year. With the real estate market collapsing and local governments losing significant revenue sources from land sales, they are eager to find new funding sources, hence turning their attention back to the wealthy.
An article highlighted a case in a city in Henan Province, where a Communist Party official had not received a salary for a year and a half. When asked whether the overseas investment tax payments from the wealthy would be used to pay civil servant salaries, the official expressed that the government’s debt is significant, and it’s unlikely these funds would be used for salaries.
In order to pay their taxes, some Chinese billionaires have resorted to using their overseas assets as collateral for loans from banks, becoming a primary source of income growth for major banks like Goldman Sachs and JPMorgan Chase. Additionally, some companies are contemplating providing loans to their founders to help them pay their taxes.
For the wealthy, repatriating money to China to pay taxes poses a significant challenge. To control the exchange rate of the renminbi, the Communist Party imposes restrictions annually on the amount of funds that can be transferred in and out of the country. To assist the wealthy in transferring funds for tax payments, cities like Chengdu and Zhuhai have reportedly set up so-called “green channels” to facilitate the rapid transfer of funds for tax purposes.
In May this year, the tax authorities in Shijiazhuang announced the establishment of a dedicated team to help individuals pay taxes by remitting funds overseas.
To reduce their tax burden and protect themselves, the wealthy have been requesting the Communist Party authorities to further clarify relevant rules. For example, a recent amendment specifies that offshore trusts established before January 1, 2023, would not be subject to retroactive regulations, but the “ongoing earnings” and “assets injected after 2023” would be.
Some billionaires are inquiring with tax authorities about how many years of transaction records will be retroactively traced, whether losses in a certain year can offset profits, and whether lump-sum payments can reduce tax amounts. Due to bank records being automatically deleted after seven years, the tax compliance work has been affected.
Moreover, some wealthy individuals are questioning the valuation methods used in certain tax bills, which are based on historical highs of assets when many listed stocks have significantly depreciated. Since the Communist Party currently lacks a unified tax valuation model, the final tax amount can be determined through private negotiations.
The massive tax collection operation launched by the Communist Party this time, unprecedented in scale, is also presenting significant opportunities for global financial institutions. A banker in Hong Kong revealed that this summer has been the busiest on record, with almost all their time being devoted to handling tax matters. Their bank has been busy assisting clients in selling bulk stocks of their enterprises, private planes, stock portfolios, and other assets as collateral for loans.
Looking ahead, the prospects are not optimistic. Barclays analysis suggests that the Communist Party can harvest up to $100 billion in taxes this time, but a tax attorney in China estimates that the actual tax collection scale could be only between $15 billion to $25 billion.
Regardless of the final numbers, this round of tax recovery could impact how wealthy individuals from China set up trusts overseas in the future. Many billionaires are concerned that after paying their tax dues this year, their vast foreign wealth will be exposed, leading to external inquiries about their wealth accumulation.
Some wealthy individuals have voluntarily proposed paying significant tax amounts upfront and have informally been informed that the payment deadline can be extended to five years.
In conclusion, for Communist Party officials at the local level, they will have to continue meeting tax revenue targets and fulfilling their duties in the years to come. This tax frenzy would be best continued for these officials.