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China's Tax Campaign Won't Scare Off Investors

4 MINS READAug 2, 2002 | 01:53 GMT
Summary

China's official media reports that tax revenues are suffering a $3.6 billion annual loss due to tax avoidance by multinational corporations. The report comes amid a high-profile government crackdown on tax evaders, particularly among China's rich and famous. But, despite the increased focus on the tax practices of foreign firms, China's vast markets and low-cost labor likely will keep these companies from leaving.

Analysis

Officials from China's State Administration of Taxation say the nation's tax revenues are short $3.6 billion annually due to tax avoidance by multinational corporations, the official People's Daily reported July 31. The article follows the government's recent criticism of tax evasion by China's rich and famous and its exhortations to the average citizen to do his or her civic duty and pay personal income tax.

This is all part of Beijing's nationwide campaign to improve tax collection and boost revenues to fund the developing social welfare system. The government is modifying the tax codes, attempting to catch tax cheats and seeking to rein in regional and local officials who continue to set their own tax rates contrary to central government regulations.

While initially targeting the super-rich Chinese, now Beijing is going after foreign firms, which in the past have received lower tax rates and special benefits. Although this may cause some friction with foreign companies, Chinese officials are fairly confident that the cheap labor and massive markets that attracted foreign firms in the first place will be enough incentive to keep them there.

Chinese central government officials have been struggling to get a grip on China's taxes for years. Beijing launched its campaign against tax evasion in January 2001, following the revelation of a massive tax fraud scandal in southern China that cost the government as much as $12 billion. The first to be investigated were regional and local government officials, who were not only defrauding the central government but also adding to the already dismal public view of the Communist Party through their corrupt practices.

More recently, Beijing set its sights on the rich and famous, investigating and detaining several top business leaders as well as a famous Chinese actress, Liu Xiaoqing. But Beijing has found that squeezing taxes out of powerful business leaders is as delicate a task as investigating its own government officials.

The central government is looking more and more frequently toward private entrepreneurs as potential Communist Party members and as necessary components in maintaining China's economic growth and social stability. By publicizing a few cases as examples, Beijing hopes to persuade the rest to contribute voluntarily to the nation's tax coffers.

When looking at the tax-paying records of multinational firms, Chinese leaders are confronted with a similar dilemma: how to get more money out of these companies without alienating them too much.

Over the past few months, several multinationals have announced plans to move or establish regional headquarters in China, including Siemens, General Electric plastics group and Motorola's energy department. According to a survey by Fortune magazine, 92 percent of multinational corporations are considering putting regional headquarters in China, and other reports say at least 70 firms already are based in Shanghai alone.

Collecting more taxes from these corporations could prove lucrative for China, far beyond the estimated $3.6 billion it is currently in arrears with annually. The People's Daily reports that that figure fails to account for unpaid personal income tax and turnover tax. According to another People's Daily report, in the first two weeks of July, in the city of Beijing alone, officials collected $7.66 million in back personal income taxes from employees at representative offices of foreign firms.

Additionally, by next year China is preparing to eliminate special low tax rates for foreign firms. This will augment further the amount of revenue the tax department can collect from these businesses — the country's finance minister has said such legal tax breaks cost the state more than $12 billion a year.

Yet, while some smaller foreign businesses may reconsider their presence in China, the new tax regulations and the more structured enforcement of tax codes is unlikely to drive away multinationals intent on tapping China's cheap labor and potentially lucrative domestic market. And by paying their taxes, they may even assist the government in maintaining social stability in China, as more funds come available for the development and maintenance of a new state-run social welfare system that assists laid-off workers and offers training for China's unemployed and underemployed.

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