The Chinese Tax Noose Is Tightening

As the rush to try and save its economy via stimulus continues, China is simultaneously looking to shake down its citizens for unpaid taxes.

Chinese authorities are urging wealthy individuals and corporations to conduct “self-inspections” to ensure all taxes are paid, as the country seeks to boost revenue, according to an FT report out this week. This push for compliance may further impact investor confidence in China’s economy, the world’s second largest.

Beijing is set to announce a major fiscal stimulus aimed at stabilizing local government finances, which have been strained by debt and delayed payments, the report notes.

Economists hope this new phase, building on efforts from September, will boost investor and household confidence after prolonged deflation linked to the property crisis.

With China’s third-quarter growth falling below the 5% target, recent tax demands have caused concern and even “fear” among wealthy individuals in cities like Beijing, Shanghai, and Shenzhen, according to a local tax advisor.

One China-based tax partner said: “Some of them simply didn’t really know what to declare when they were asked to conduct self-inspections. Many also didn’t realize before . . . [that] their overseas personal gains would be subjected to taxes in China.”

FT reports that companies completing self-inspections have been instructed to submit stamped confirmations and keep records for potential review, according to a city notice seen by the Financial Times. Authorities are also asking individuals to pay back-taxes on overseas investments, sometimes citing a rarely used 2019 law.

A lawyer noted that wealthy clients can negotiate with tax officials, allowing some flexibility in tax obligations. This revenue drive, including increased fines on the private sector, comes as local and central governments seek funds amid a three-year property downturn that has strained finances.

Government land sales fell nearly 25% in the first nine months of this year, and tax revenue dropped 5.3%, leading to a 2.2% decline in fiscal revenue to Rmb16.3tn ($2.3tn).

Gary Ng, a senior economist at Natixis, concluded: “China’s fiscal deficits have reached a tipping point. There is more urgency to find alternative revenue sources . . . and taxing the wealthy and some companies creates a less direct economic impact on most residents.”