China’s economy has been facing difficulties, prompting the Chinese Communist Party to attempt to increase tax revenue by targeting the overseas investment returns of super-rich individuals. However, experts warn that this move could further damage business confidence.
According to a report by Bloomberg on Tuesday (October 15th), wealthy individuals in some major Chinese cities are facing overseas investment profit taxes of up to 20% as the Chinese government begins to enforce foreign investment regulations.
In recent months, affluent individuals in some major Chinese cities have been required to undergo self-assessment or summoned by tax authorities for meetings to evaluate potential tax amounts owed, including outstanding debts from recent years.
This initiative underscores the government’s urgent need to expand sources of revenue amidst declining land sales and slowing economic growth. It also echoes the concept of “common prosperity” put forward by the Chinese Communist Party leader, Xi Jinping. Since the commencement of this multi-year crackdown initiated by the Chinese Communist Party, attention has been focused on China’s wealthy, impacting industries such as consumer internet companies, finance, and real estate.
Founder of Black Diamondz, Monika Tu, expressed to the Australian Financial Review (AFR), “The goals keep changing, leading people to not buy anything at all.” Her company specializes in facilitating connections between Australian real estate and Chinese buyers.
She added, “Uncertainty is the worst for businesses, and there is currently no confidence in China.”
Boston Consulting Group estimated in 2018 that out of the total personal wealth of $24 trillion in China, approximately $1 trillion is held overseas.
According to United Nations data, there has been a significant increase in the emigration of wealthy individuals from China, with over 1.2 million people leaving the country since 2021.
Daniel Ho, Managing Director of Juwai IQI, a Chinese real estate investment platform, stated, “Some high-net-worth Chinese individuals may temporarily halt new acquisitions of Australian real estate.”
He further noted, “Those who already own Australian real estate worth $10 million or more may choose to sit back and observe.”
In 2018, China implemented the Common Reporting Standard (CRS), a global information-sharing system aimed at preventing tax evasion.
Some of the targeted Chinese wealthy individuals possess at least $10 million in overseas assets, while others are shareholders of companies listed in Hong Kong and the United States.
According to the CRS, China has exchanged information regarding individuals subject to tax obligations with nearly 150 jurisdictions over the past six years.
Patrick Yip, Vice Chairman of Deloitte China, stated, “China (the Chinese Communist Party) possesses a significant amount of CRS data, allowing tax authorities to easily explore these data for collection opportunities. The potential for individual tax audits will rise compared to corporate tax audits.”
Government revenue from land sales has dropped by 25% to 2 trillion yuan, while tax revenue has decreased by 5.3%. Meanwhile, China’s fiscal revenue declined by 2.6% year-on-year from January to August, reaching around 14.8 trillion yuan (approximately $3.1 trillion).
“In the future, enforcement of the personal income tax law will become stricter,” said Peter Ni, a partner at Zhong Lun Law Firm in Shanghai and tax expert, in a statement to Bloomberg. He added, “Ultimately, the overseas income of these high-income individuals will become specific targets for tax authorities.”