Market concerns are mounting as local governments in China have started retroactively checking corporate taxes and increasing fines amid growing financial pressure. Despite authorities denying speculations of a nationwide crackdown on tax evasion, the surge of tax inspections across various regions indicates that there is substance to these concerns. Netizens are heatedly discussing that this is a rhythm pushing private enterprises and employment to the brink.
Since mid-June, several Chinese listed companies have revealed that local governments are demanding them to pay taxes dating back to the 1990s, sparking worries that local governments are doing so to fill their coffers.
Weige Foods was retroactively investigated by the Chinese authorities for tax issues of its former subsidiary Zhijiang Liquor for 30 years, and was asked by relevant departments to pay back over 85 million yuan in taxes. Additionally, Shunhao Shares, Beida Pharmaceuticals, Zangge Mining, Hualin Securities, and Lianjian Optoelectronics have all announced their intention to pay back taxes.
There are even companies that have announced directly that they will be “lying flat.” Bohui Shares announced a production halt on June 13, reportedly linked to being notified by the tax authorities to pay nearly 500 million yuan in taxes.
From 2021 to 2023, the number of listed companies that issued announcements to pay back taxes were 3, 1, and 5 respectively.
The Chinese State Administration of Taxation stated on Tuesday (June 18) that it has not initiated nationwide or industry-wide tax inspection activities, nor does it intend to review corporate tax evasion behaviors dating back two to three decades.
In 2018, the Chinese government merged local tax bureaus and national tax bureaus into a unified national administrative institution, where local branches report directly to the central headquarters, as Beijing aims to improve tax collection efficiency and resist interference from local governments.
Despite the Chinese government’s efforts to boost business confidence following years of stringent controls and a prolonged downturn in the real estate market, Chinese companies, especially private enterprises, have been reluctant to borrow and invest, posing a challenge for policymakers. The Wall Street Journal reported that analysts believe carefully planned crackdowns on tax evasion could further dent business confidence in China.
Recent tax inspections in China are not isolated cases. Below is a list of tax inspections compiled from online sources, not limited to public companies:
– Foshan, Guangdong: New World Hotel was retroactively investigated for 25 years and was required to pay over 900,000 yuan in back taxes due to historical tax issues.
– Huizhou, Guangdong: Huizhou Taiji Group was investigated for 20 years and was asked to repay 53.04 million yuan in undeclared taxes from 2000 to 2008.
– Qinghai: Zangge Mining, a listed company, was investigated for 20 years and was ultimately required to pay nearly 188 million yuan in back taxes and late payment fines, with the late payment amount being 2.38 times the tax amount.
– Yueyang, Hunan: A well-known local developer was investigated for 20 years and was legally required to pay over 900 million yuan in back taxes and fines.
– Hangzhou, Zhejiang: Hangzhou Yishang Clothing was investigated for 10 years and was found to have evaded 210 million yuan in taxes from 2014 to 2021, resulting in a legal penalty of 360 million yuan in back taxes and fines.
– Ningbo, Zhejiang: Listed company Bohui Shares underpaid consumption tax by approximately 500 million yuan.
– Zhijiang, Hubei: Weige Foods’ former subsidiary, Zhijiang Liquor, was retroactively investigated for 30 years and was found to have underpaid 85 million yuan in consumption tax from 1994 to 2009, leading to a legal requirement for repayment.
– Lhasa, Tibet: Hualin Securities, a listed company, was investigated for 6 years and was found to owe approximately 47 million yuan, including an income tax of 29.32 million yuan and an additional late payment fine of 18 million yuan from 2018 to 2023.
Recently, various regions in China have been setting up “Tax Inspection Operations Centers,” along with news of 30-year tax inspections on enterprises, indicating that the national or local fiscal situation is under significant strain.
On the other hand, organized efforts to combat tax evasion may further undermine business confidence in China.
The First Financial Daily hinted on Monday (June 17) that, according to tax officials at the provincial and city levels, there is currently no national tax inspection deployment.
However, the article unexpectedly admits the possibility of local governments conducting tax inspections to ease financial pressures. “In recent years, impacted by economic downturns, large-scale tax reductions and fee reductions, and a stagnating real estate market, local fiscal revenues have been under pressure, while fixed expenditures keep rising. In the context of escalating financial discrepancies, local governments have greater incentives to enhance tax collection, plug loopholes, and lawfully collect due taxes.”
The article also warns that “in the current economic situation, the pain felt by enterprises will be more pronounced. Some enterprises may choose to shut down if they cannot bear the burdens, which will not only affect employment but also have negative impacts on the macroeconomic operation.”
There is a hot discussion online about the Chinese government conducting 30-year tax inspections, seen as targeting and potentially bankrupting private enterprises and employment.
A media personality named “Lao Xu” wrote that a 30-year retroactive inspection is indeed frightening, as many listed companies started as small businesses and were not entirely compliant during their early stages. He warned that with the current economic conditions, where businesses are struggling, especially this year where profits are hard to come by and jobs are scarce, conducting tax inspections at this time would exacerbate the situation.
He mentioned that since the tax reform, local revenues heavily rely on land sales, but with the current real estate downturn, local finances are strapped for cash and are seeking ways to generate more income.
Some are looking back in history to assess the impact of past instances of tax inspections by the Chinese government.
One internet user commented, “Who can bear this? Do you know how taxes were checked in Shanghai in the 1950s? Many entrepreneurs jumped off buildings.”
Another comment reads, “Those who often make repayments know that repaying 800,000 yuan frightens off 8 billion yuan.”
“The key issue is the 30-year inspection. What standards and laws are you using to conduct these checks? How many times have tax laws and regulations changed in 30 years? Things that were legal and compliant in the past have become illegal as laws have been constantly changing. Are you using today’s standards of illegality to enforce past legality?”
Another internet user stated, “Unless all enterprises are ruined, it won’t be complete,” emphasizing the devastating consequences of drastic tax investigations on businesses.