The CCP Calls on Companies and the Wealthy to Pay Back Taxes, Risking Another Blow to Investor Confidence

Key officials under Xi Jinping frequently disappear. (Illustration by People News)

November 4, 2024 - Due to the real estate sector’s slump and the economic downturn, the CCP is running out of money. The government is urgently seeking ways to fill fiscal gaps, instructing wealthy individuals and companies to carefully examine any unpaid taxes. Foreign media believe this move may further weaken investor confidence in China.

According to a report from The Financial Times on November 4, CCP tax officials have asked wealthy individuals and companies to "self-examine" their tax situation and pay any owed taxes over the past few months. Local governments are struggling to generate revenue to refill their coffers, which have been depleted by the real estate market’s downturn.

This measure comes as China’s third-quarter economic growth fell short of official targets.

Unease and Fear Among China’s Wealthy

A tax partner based in China told The Financial Times that these tax requirements have sparked unease and even "fear" among China’s wealthy in cities such as Beijing, Shanghai, and Shenzhen.

"Some of them, when asked to conduct a self-examination, have no idea what they are supposed to report," the partner said. "Many were also unaware that their overseas personal income would be taxed in China."

Bloomberg previously reported that, in response to Xi Jinping’s “Common Prosperity” campaign, CCP tax authorities have been summoning wealthy individuals in recent months, while others have been asked to conduct self-assessments. Sources reveal that some individuals contacted have at least $10 million in overseas assets, while others are shareholders in publicly listed companies in Hong Kong and the U.S. They may face an investment income tax of up to 20%, with penalties for late payments.

A notification from one city seen by The Financial Times indicates that companies that identify no issues during their self-examination must submit a stamped certification and "retain evidence for inspection."

Sources told The Financial Times that authorities are also requiring individuals to begin paying back taxes, including on personal overseas investment income, citing rarely used legal provisions from 2019 in some cases.

A lawyer noted that his wealthy Chinese clients were able to negotiate with tax officials, showing that there is some "wiggle room" regarding their potential tax liabilities.

Kher Sheng Lee, co-chair of the Alternative Investment Management Association (AIMA) Asia-Pacific, told The Financial Times that Beijing's push to tighten tax collection is driven by pragmatism and the current economic situation. "On the other hand, if enforcement intensifies, it could shake (business and) investor confidence," he said.

"Local Governments Clearly Lack Funds"

China’s real estate market has languished for three years, impacting local government finances and undermining confidence among households and investors.

Revenue from government land sales, one of the primary sources of government income, dropped nearly 25% year-on-year in the first nine months of this year. National tax revenue fell by 5.3% during the same period. Official CCP data shows that from January to September this year, China’s total fiscal revenue fell 2.2% compared to the same period last year.

The enforcement of taxes on overseas investment income for the wealthy and companies highlights the government’s urgency in expanding revenue sources, especially amid depleted land sales and half-empty skyscrapers. Additionally, both central and local CCP governments have significantly increased fines and penalties on the private sector to raise revenue amid fiscal crises.

"Local governments are clearly out of money," said an executive at a medium-sized manufacturing company in Suzhou to The Financial Times.

He added that local authorities often impose heavy fines on companies in his area.

According to Yicai, fines and confiscation revenue in seven out of sixteen provinces increased significantly last year, with Chongqing and Beijing seeing increases of 22.4% and 21.9%, respectively. Many local governments have stopped publishing records of fines.

The Boston Consulting Group estimated in 2018 that of China’s $24 trillion in personal wealth, around $1 trillion is held overseas. According to United Nations data, the number of wealthy Chinese citizens emigrating has also surged, with more than 1.2 million people leaving China since 2021.

Editor: Ye Ziwei