Facing budget crunches, China chasing unpaid taxes

BEIJING

Chinese authorities are chasing unpaid taxes from companies and individuals dating back decades, as the government moves to plug massive budget shortfalls and address a mounting debt crisis.

More than a dozen listed Chinese companies say they were slapped with millions of dollars in back taxes in a renewed effort to fix local finances that have been wrecked by a downturn in the property market that hit sales of land leases, a main source of revenues.

Policies issued after a recent planning meeting of top Communist Party officials called for expanding local tax resources and said localities should expand their “tax management authority and improve their debt management."

Local government debt is estimated at up to $11 trillion, including what's owed by local government financing entities that are “off balance sheet,” or not included in official estimates.

More than 300 reforms the party has outlined include promises to better monitor and manage local debt, one of the biggest risks in China’s financial system.

That will be easier said than done, and experts question how thoroughly the party will follow through on its pledges to improve the tax regime and better balance control of government revenues.

The scramble to collect long overdue taxes shows the urgency of the problems.

Pressures have been building as the economy slowed and costs piled up from “zero-COVID” policies during the pandemic.

Economists have long warned the situation is unsustainable, saying China must beef up tax collection to balance budgets in the long run.

Under leader Xi Jinping, the government has cut personal income , corporate income, and value-added taxes to curry support, boost economic growth and encourage investment — often in ways that favored the rich, tax scholars say.

According to most estimates, only about 5 percent of Chinese pay personal income taxes, far lower than in many other countries. Government statistics show it accounts for just under 9 percent of total tax revenues, and China has no comprehensive nationwide property tax.

Finance Minister Li Fo'an told the official Xinhua News Agency that the latest reforms will give local governments more resources and more power over tax collection, adjusting the share of taxes they keep.

Sudden new tax bills have hit some businesses hard, further damaging already shaky business confidence. 

Experts say the arbitrary way taxes are collected, with periods of leniency followed by sudden crackdowns, is counterproductive, discouraging companies from investing or hiring precisely when they need to.