The 20th Third Plenary Session of the Chinese Communist Party (CCP) is set to be held in Beijing, where a new round of so-called fiscal and taxation reform measures is expected to be introduced. This “reform” may involve adjusting the fiscal revenue and expenditure allocation between the central and local governments, allowing local governments to retain more tax revenues.
Analysts have pointed out that the goal of this fiscal and taxation reform is actually to address the issue of “unequal distribution of resources” between the central and local governments. The central government’s move is aimed at appeasing local officials, encouraging them to continue serving the CCP, thereby maintaining political stability and shifting the corresponding responsibilities back to the local governments.
The CCP’s Third Plenary Session is scheduled to take place from July 15 to 18 in Beijing, with authorities preparing to introduce a new round of fiscal and taxation reform. Recently, Minister of Finance of the CCP, Lan Foan, delivered the “Report on the Central Budget for 2023” to the Standing Committee of the National People’s Congress. When discussing the next focus of fiscal work, Lan Foan mentioned the need to “advance the new round of fiscal and taxation system reform”.
At the end of 2023, the CCP Central Economic Work Conference first proposed to “plan” a new round of fiscal and taxation reform, and subsequently, official CCP documents have continued this rhetoric. Lan Foan’s call to “advance” the new round of fiscal and taxation reform indicates that the “fiscal and taxation reform” will gradually move into the implementation phase, according to Chinese fiscal and taxation law experts.
Reports suggest that the CCP’s “fiscal and taxation reform” will focus on allowing local governments to retain more fiscal revenue. The main changes may revolve around how much revenue local governments can retain, rather than increasing or raising taxes. Local governments may be allowed to retain a significant portion of consumption tax (about one-tenth of China’s total tax revenue) and more value-added tax (over one-third of China’s total tax revenue). This measure aims to curb the accumulation of local government debt through balancing revenue and expenditure.
Chinese media have also published articles stating that some experts believe that the focus of this fiscal and taxation reform should be on enhancing local vitality and leaving more revenue to the local government.
China’s securities firm, CITIC Securities, believes that the CCP’s “fiscal and taxation reform” this time will focus on balancing the central and local (central-local) relationship, aiming to address the mismatch between fiscal power and administrative power between the central and local governments.
Currently, local CCP governments receive half of the value-added tax revenue and 40% of individual income tax, while the central government receives the majority of corporate income tax and all consumption tax revenue. Consumption tax is currently levied on producers and importers in China.
In 1994, the CCP implemented a tax-sharing reform, setting up separate departments for national taxes and local taxes, and in 2018, the two were merged. Before the implementation of the tax-sharing system, central fiscal revenue continued to decrease while local governments experienced a continuous increase in fiscal revenue due to economic growth. Therefore, the 1994 tax-sharing reform was actually based on the fact that the central government was short of money, while local governments had surplus.
After 2000, the CCP carried out two major tax revenue sharing “reforms”, and the local tax system section gradually diminished. One was the enterprise income tax sharing reform in 2002, where previously, local tax bureaus collected enterprise income tax revenue. After the “reform,” the central government further centralized financial resources by changing the enterprise income tax, which originally belonged to local finances, to a shared tax, with the central government taking 50%, which increased to 60% by 2003. Once it became a shared tax, the tax collection shifted from local tax bureaus to national tax bureaus.
In 2018, local national tax bureaus and local tax bureaus in various provinces, autonomous regions, and municipalities in China merged, essentially changing the distribution of financial revenue between the central and local governments once again, with the CCP central government reclaiming more financial power.
From 2011 to 2021, the contribution of land sales to local budgets increased from one-fifth to nearly one-third. By 2021, China entered a severe downturn in the real estate market. By 2023, the revenue from land sales had dropped from the peak of 8.7 trillion yuan (about 1.3 trillion US dollars) in 2021 to 5.8 trillion yuan (about 780 billion US dollars).
On July 4th, economist David Huang, residing in the United States, told a reporter from Epoch Times that after the CCP central government reclaimed financial power, local tax revenues were concentrated in Beijing and then transferred to the central government. This practice has caused dissatisfaction among provinces with better economic conditions because they receive less in return after handing over taxes, while many remote provinces rely heavily on central transfer payments. In the past, this imbalance was difficult to address, as the central government relied on a single control mechanism for transfer payments, a contradiction that has yet to be resolved. In recent years, due to epidemic restrictions and a downturn in the real estate market, local finances have further tightened.
“This coincided with the same time, and was not directly related, further pushing the tax-sharing reform to the local level,” Huang said. “Most people misunderstand that the recent fiscal and taxation reform is due to financial difficulties, but that is not the case. Local finances are now in serious trouble, and relying solely on tax revenue will not be able to solve the financial problems within the next three to five years; it’s practically impossible.”
Yezhiqiu, a media professional living in New Zealand, also commented that the so-called fiscal and taxation reform planned by the CCP is aimed at addressing the issue of “unequal distribution of resources” between the central and local governments, while also shifting some responsibility back to the central government.
Yezhiqiu told an Epoch Times reporter that due to the differing income levels of various provinces in China, there has always been a contradiction between the central government and local governments, but this wasn’t particularly prominent before. In recent years, the CCP central government has continuously tightened financial power, especially after the merge of national and local taxes in 2018. Under the leadership of CCP General Secretary Xi Jinping, financial power has been further concentrated at the central level, funds are pooled at the central level, effectively redistributing tax revenue from affluent provinces to less prosperous ones.
“To put it simply, it’s like the mafia feeding small brothers; the CCP does the same, needing local governments to work for them, so they have to give local officials benefits and privileges,” Yezhiqiu stated. Previously, the primary source of benefits for local officials came from real estate and infrastructure. For them, the benefits of land finances went beyond achieving political achievements and GDP growth; their personal gray income was also quite high. Additionally, another portion of benefits came from financial expenditures, which included various kickbacks and corruption, as well as indirect benefits such as public consumption expenses.
Yezhiqiu stated that in the past, local officials acquired benefits from businessmen through power rent-seeking and collaboration, so while they may be dissatisfied with the central government’s fiscal revenue distribution, it was not the most prominent contradiction. However, with the collapse of the real estate market and the breakdown of land finances, the gray income of these officials has significantly reduced, sparking their discontent. By taking away the bulk of local tax revenue, the central government has also taken away power, leading to an increasingly prominent contradiction between the central and local governments.
He said, “So currently, the CCP is effectively pacifying people by offering more benefits to these officials, allowing them to continue to work for the CCP to maintain political stability. This is essentially an internal stability measure, which means returning a larger share of tax revenue to local governments, while also pushing the responsibility back to them. If the local government continues to spend more than they earn, it shows that the primary responsibility lies with the local government itself, and not with the uneven distribution of resources from the central government. This is essentially what it means.”
Recently, tax departments in many regions of the CCP have begun retroactively investigating some companies’ tax payments dating back 30 years, causing social panic. As the CCP hints at initiating a new round of “fiscal and taxation reform,” this backtracking trend has sparked widespread speculation.
On the evening of June 13th, China’s long-established company WeWe Group was investigated by CCP authorities for its subsidiary’s tax issues dating back 30 years, and was required by relevant departments to make a payment of over 85 million yuan (about 11.94 million US dollars).
Ningbo Bohui Chemical Technology Co., Ltd. in Zhejiang announced on the same day that some aromatic oil installations were shut down. Before the shutdown, the company needed to make a tax payment of nearly 500 million yuan (about 70.27 million US dollars).
Since the beginning of this year, besides WeWe Group, other A-share companies like Shunhao Co., Ltd., Beida Pharmaceuticals, Hualin Securities, and Lianjian Optoelectronics have issued announcements related to making additional tax payments; the number of listed companies issuing announcements related to additional tax payments in 2021, 2022, and 2023 were, respectively, three companies, one company, and five companies.
In response to this, Yezhiqiu stated that the new round of “fiscal and taxation reform” by the CCP has not even been officially introduced yet, and there are already instances of investigations dating back 30 years, indicating that local governments are truly strapped for cash. With the real estate market collapsing and officials unable to profit, even the income of some regional civil servants has been affected. Therefore, local government officials are trying to extract funds from the public through this so-called investigation method.
(Contributed by reporter Ning Xin)