As Chinese local governments struggle with high levels of debt, moribund infrastructure projects, falling tax revenues, shrinking land-use fees, and increased demands for local welfare spending, some local government departments and state-owned enterprises have been exploring creative ways to replenish their depleted coffers. In April, after thousands of public complaints, public utilities in Chongqing and Chengdu, Sichuan province, were investigated and penalized for vastly overcharging residential customers for natural gas after the installation of new “smart” gas meters. That same month, some village cadres in Inner Mongolia were sacked after they were caught on viral video trying to block local farmers from plowing their fields unless they paid the village exorbitant, ad-hoc fees. And earlier this year, a businesswoman attempting to collect a debt from a local government in Guizhou was detained, along with members of her legal team, and accused of “picking quarrels and provoking trouble,” just for standing up for her rights as a creditor.

More recently, there has been an upsurge in anecdotal reports of Chinese companies being targeted for retroactive tax audits, some dating back decades, and incurring hefty fines. The topic has generated intense interest on Chinese social media, and there also appears to be some online censorship of the topic: CDT Chinese editors recently archived two related WeChat posts, one of which was later deleted. 

Today’s Quote of the Day is from Weibo user MIS红衫鱼, commenting on the many reports of retroactive tax collection by cash-strapped local tax authorities, amid recent news that the Chinese Ministry of Finance would issue ultra-long-term (20-, 30-, and 50-year) special treasury bonds to finance both national and local projects:

“Collecting 30-Year-Old Tax Debts, and Issuing 50-Year Bonds” [Chinese]

Although China’s State Taxation Administration denied that it has launched a nationwide or industry-wide tax inspection campaign, many netizens are deeply skeptical, and suspect that fiscal pressures are driving local tax authorities to conduct audits reaching further and further into the past. As the Wall Street Journal reported:

China’s State Taxation Administration said Tuesday that it hasn’t launched a national or industry-wide tax inspection campaign, nor does it plan to scrutinize company tax evasion that could be traced back 20 or 30 years.

The remarks came after several Chinese-listed companies recently revealed they had been asked by local authorities to pay tax bills dating back as far as the 1990s, sparking speculation that regional governments are doing so to fill local coffers.

The Jiangsu-based V V Food & Beverage Co. said last week that a liquor-making unit it used to own was told to pay roughly 85 million yuan ($11.7 million) for undisclosed income from the 1995-2009 period. Elsewhere in Zhejiang, a chemical manufacturer has suspended some of its production lines after being asked to pay additional taxes that could amount to as much as RMB 500 million yuan due to a change in tax rules.

[…] While the top taxation agency tried to calm spooked businesses with its comments, it also pledged to further crack down on tax fraud and create a fair market environment. Beijing has been rolling out a new tax surveillance system in recent months, a tool some have described as a powerful “X-ray machine” that can cross-examine huge amounts of personal and financial data collected by various government departments. [Source]

A now-deleted WeChat article by 星辰大海的边界 (Xīngchén dàhǎi de biānjiè, “Boundary of the Universe”) lists some of the companies that have been retroactively investigated and fined, and notes that the retroactive audits could affect both individual and corporate taxpayers:

Recently, many businesses and individual residents have received notices requesting payment of back taxes.

On the one hand, there are the many [Chinese] investors in American stocks who received unexpected text messages from the tax bureau, reminding them about “undeclared sources of foreign income.”

This is quite alarming. In the past, this was always a gray area, and no one cared much about it. But if these investors are really starting to be audited, the tax rate [on such foreign income] would range from 20% to as high as 45%.

On the other hand, there are the many listed companies caught up in the wave of back-tax repayment requests. 

[…] Immediately after [Friday’s 85 million yuan ($11.7 million U.S. dollar) fine imposed on a former subsidiary of V V Food & Beverage Co.], five companies, including Shanghai Shunho, PKU Healthcare, ChinaLin Securities, and LianTronics, all issued announcements about having to pay back taxes.

The most extreme example among these was Ningbo Bohui Petrochemical, with a market capitalization in excess of 1.3 billion yuan (over $179 million dollars), which was ordered to pay an additional 500 million yuan (nearly $69 million dollars) in back taxes. In a fit of pique, the company essentially just gave up and announced that it was suspending production, sending its stock tumbling until trading was halted on Friday.

Anyone with a keen eye can see that a strict crackdown by tax authorities is now underway, and this may just be the beginning. [Chinese]

Another WeChat article, “Audits Going Back 30 Years Send a Dangerous Signal,” by 筑基政经 (Zhùjī zhèngjīng, “Fundamentals of political economy”), compares retroactive corruption investigations and retroactive tax investigations, and argues that while the former make sense, the latter send a dangerous signal and could result in more bankruptcies and layoffs in an already weak economy:

Assuming this is not the purview of the “Bureau of Archaeology,” for other government bureaus that want to investigate past misdeeds, how many decades back should they be allowed to dig?

A few years ago, when Inner Mongolia launched a 20-year retroactive investigation into corruption in the coal mining and processing industry, it attracted a great deal of public attention.

At the time, I speculated about whether this innovative approach might be imitated by other government departments or applied to other industries and sectors. 

[…] Unlike the generally positive public response to Inner Mongolia’s retroactive anti-corruption campaign, some people are deeply worried at the prospect of a retrospective tax investigation stretching 30 years into the business accounts of a liquor company.

[…] Today, that liquor company can be forced to pay back taxes spanning three decades. With this precedent in place, other similar companies may worry that at some distant point in the future, they will end up on the hook for back taxes incurred decades earlier.

If such an expectation takes hold, some business owners—out of a fear of having to pay hefty back-tax bills—may simply choose to close up shop and dissolve their companies, thus worsening unemployment. [Chinese]