Photographer: Kevin Frayer/Getty Images

China's Tax Reform May Hit the Country's Wealthiest

  • Tax burden often falls far from those with most ability to pay
  • New Finance Minister Xiao Jie was tax administration chief

Days after taking the job, Chinese Finance Minister Xiao Jie is accelerating income tax reforms that could help fill government coffers by digging into the pockets of the wealthiest.

A new office established at the ministry this month will be specifically devoted to handling payments from individuals, separating that responsibility from corporate tax collection. Tax authorities also are getting more power to monitor overseas accounts of citizens and track the finances of the wealthiest, whose incomes aren’t always on the government’s radar.

Once in place, the wealthy stand to pay more on investments and foreign assets while the middle class and poor are likely to pay less and benefit from government spending that’ll be better funded, according to Shi Zhengwen, a professor at China University of Political Science and Law in Beijing. As part of a broader income-tax shake up, the moves should support the economic rebalancing toward consumer-led growth.

"China needs to develop and ensure a progressive tax code so that the primary weight of these taxes falls on those with the means to pay," said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies in Washington. He said it also helps "limit the growth of public debt."

Xiao, 59, is a former chief of the State Administration of Taxation, which shares responsibility for setting tax policy with the finance ministry. He spent more than two decades at the ministry starting in 1982, rising to become a vice minister in 2001. He also served as a top aide at the State Council, China’s broad equivalent of a cabinet.

‘Push Ahead’

"The new finance minister can leverage his experience in the tax system to push ahead," said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. Yeung said. "There’s still a lot to do."

China is getting better visibility into foreign earnings and assets after signing on in 2014 to the Common Reporting Standard, a global tax information sharing agreement backed by the Organization for Economic Cooperation and Development.

Tax administration officials will be able to obtain overseas financial statements for Chinese citizens after Jan. 1, according to a recent draft regulation published by the agency. The new rules provide a legal means for China to cooperate with more than 100 other countries to combat cross-border tax avoidance, according to a Bloomberg BNA analysis.

Reforms Stymied

While the government has long sought reforms to overhaul the structure of income taxes, those have been stymied in the past by not being able to access individual holding details. Chinese also are exempted from income tax on deposit interest and stock investments.

"The ability to obtain information and analyze it are the bottlenecks confining China’s tax collection," said Oliver Kang, China tax partner at PricewaterhouseCoopers LLP in Beijing. He said reforms are popular and should make progress next year, "although amending tax laws usually requires a long deliberation process."

In March, then-Finance Minister Lou Jiwei said that plans to reform the income-tax system will include deductions such as mortgage interest, education expenses and the cost of raising children. Those details are still in the works and haven’t been announced so far.

Rich, Poor

Taxation under the current system falls more heavily on ordinary wage earners instead of those with high investment incomes because tax officials can more easily track company payrolls. Those with multiple accounts at home and abroad and earnings from investments such as stocks or property will be more within reach after the new rules take effect.

Personal income tax contributed 7.5 percent of total central government revenues in 2015, according to Bloomberg calculations based on finance ministry data. Boosting that share would help alleviate a shortfall after the government has added fiscal stimulus to help cement a stabilization in economic growth. The central government also has been making a range of tax cuts, including one projected to reduce corporate taxes.

Fiscal income rose 5.9 percent in the first 10 months of the year from a year earlier, while spending grew 10 percent during the period, finance ministry data show. China faces a "severe" situation in fiscal revenue as slower economic growth and earlier tax cuts are poised to reduce fourth-quarter revenue, the ministry said in September, and effective measures are needed to ensure a stable growth of fiscal income.

Boosting income and property tax revenue is a "holy grail," said Kennedy of CSIS. "Most ordinary Chinese still don’t have large incomes."

— With assistance by Yinan Zhao

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