Consequences of the CCP’s “Harvesting” of Wealthy Individuals and Private Enterprises

Sunset — The image shows a construction site in mainland China. (Video screenshot)

[November 13, 2024] Amid an economic downturn and slumping real estate market, the CCP has launched a campaign targeting private enterprises and wealthy individuals to fill fiscal gaps. This move risks further weakening confidence among businesses and investors, potentially leading to an intensification of social tensions.

Recently, numerous wealthy individuals and businesses in China have reported heightened scrutiny from tax authorities, with a renewed focus on unpaid taxes and rarely-used legal clauses being invoked.

According to The Financial Times, Chinese tax officials have, in recent months, required affluent citizens and businesses to “self-assess” their tax situations and pay any outstanding taxes. This has reportedly caused unease, and even fear, among wealthy Chinese residents in major cities like Beijing, Shanghai, and Shenzhen. Many of these individuals were reportedly unaware of certain tax obligations, such as those on overseas personal income.

Even small U.S. stock investors in China have received messages from tax authorities reminding them to declare “undeclared foreign income.”

Bloomberg reported that this latest campaign targets Chinese citizens with at least $10 million in overseas assets, as well as shareholders of companies listed in Hong Kong and the United States. The authorities are relying on a 2018 policy known as the Common Reporting Standard, an international information-sharing mechanism aimed at curbing tax evasion.

A Growing Focus on Individuals and Businesses

In recent years, as fiscal warnings have flared across various Chinese provinces, an increasing number of individuals and businesses have become targets for government revenue collection.

Since mid-June, many companies in China have received tax back-payment notices. For example, VV Group was required to pay back 85 million yuan in taxes owed between 1994 and 2009, while Ningbo Bohui Chemical was asked to pay 500 million yuan in taxes in March this year. This has sparked widespread discussion on retroactive tax audits potentially extending as far back as 30 years.

Since last year, local governments have increasingly used methods like sting operations to impose heavy fines on drivers and street vendors to boost revenue. Earlier, dozens of Chinese singers, actors, and online personalities were fined for tax evasion.

According to Yicai Global, fines and forfeiture revenues have seen sharp increases in 2023 in seven out of sixteen provinces, with Chongqing and Beijing posting respective increases of 22.4% and 21.9%. Many local governments have since ceased publicly disclosing fine-related records.

Some local governments have also established “joint police-tax operations centers” to chase down unpaid taxes, with at least 23 provinces setting up such centers since 2019.

Since 2023, numerous private enterprises in Guangdong have reported issues with cross-regional enforcement by public security from central provinces, with company accounts frozen and assets seized. This approach has come to be known as “ocean fishing.”

Mr. Wen, an entrepreneur from a southern Chinese province, shared with Epoch Times that local governments are heavily in debt, struggling to pay salaries. “One employee at a government agency we serve told me that since October last year, salaries have only been paid sporadically—sometimes for a few months, then nothing for several months. The government simply doesn’t have the funds.”

“We provide services to some car dealerships and trucking companies. I can see that most trucks just sit in the parking lot with little business, barely making it. Real estate firms are even worse off; even if they haven’t formally declared bankruptcy, they’ve essentially ceased operations, letting go of employees and leaving only a few to man the office.”

Wen noted that in the past, Chinese media and TV glorified wealth, but now people speak more openly about financial hardship. “Nowadays, people aren’t boasting but complaining.”

“In this situation, local governments use their authority to arrest and fine people, using the funds collected to pay government salaries. They start with big taxpayers, and even if you’re overseas, if you still have business interests in China or family there, they’ll target your family to get the money. Smaller shops don’t have as much to offer.”

Taiwanese businessman Li Mengju told Epoch Times that local governments have long been “harvesting” businesses. For example, if a region struggles to meet GDP targets, it would often sell land to fill the gap.

“In recent years, financial deficits have widened,” he said. “The central government has allowed local authorities more leeway to raise funds on their own, hence the retroactive tax audits. Local governments have business revenue data, so they’ll invite successful business owners in to discuss fiscal shortfalls and ask them to help make up the difference.”

Li noted, “Some business owners in Zhejiang told me that central provinces previously launched aggressive campaigns to attract investment with favorable land and tax incentives. After six months to a year, local governments changed their tune, citing various reasons for tax audits. Some businesses couldn’t keep up and simply went back to their home regions.”

“The CCP hadn’t previously taxed overseas income, but this shows they’re running out of domestic revenue sources and are now searching for any new way to generate funds,” he added.

Targeting Private Enterprises

The CCP's zero-COVID policy has drained local finances and health insurance funds, with the real estate collapse exacerbating the trend. Since 2021, land sale revenues have dropped sharply, with a decrease of 2 trillion yuan in 2022 and a further 1.4 trillion yuan decline in 2023.

With declining land revenue, troubled local governments have increasingly targeted private enterprises, imposing fines and citing tax evasion, bribery, fraud, and product safety violations, adding to an already tense business environment.

Local governments rely heavily on value-added and corporate income taxes for revenue. To prevent the public from adopting a "taxpayer" mindset like in the West, the CCP has focused on taxing businesses rather than individuals. Chinese corporate tax rates are notoriously high, sometimes referred to as "death tax rates."

A former tax officer, Mr. Li, explained that China imposes substantial corporate taxes, including value-added tax (VAT), corporate income tax, property tax, and additional consumption taxes on special items like tobacco, fuel, and cars. The high tax burden makes profitability difficult, prompting companies to minimize their tax contributions. The tax office is aware of these practices and could easily find tax evasion if they investigated. In the past, annual quotas were set for tax offices, and once met, businesses and tax authorities often maintained a mutually beneficial relationship, which included gifts and bribes, resulting in overlooked violations.

However, Mr. Li noted that with the current economic downturn and land sales no longer profitable, local governments are pressuring tax offices to extract more from businesses, breaking these past arrangements. Tax officials are now revisiting old taxes, sometimes imposing penalties of 50% to five times the owed amount but waiving fines in exchange for back payments.

“The pressure is now on businesses,” Mr. Li continued. “They have no choice but to comply because the CCP holds the legal interpretation power. The tax office knows the full scope of each business and recognizes that the further back they audit, the more revenue they’ll recover. Extending the audit period is the only way to make up the shortfall.”

Mr. Li Mengju added that the core issue lies within the CCP’s system, which operates without public accountability, causing anxiety among business owners. While national enterprises cannot be heavily targeted, the CCP is now pushing "common prosperity" by targeting wealthy individuals and private business owners without redistributing wealth to the general public.

According to Mr. Wen, the CCP’s oppressive approach relies on keeping a large segment of the population impoverished to sustain its own luxurious expenditures. When faced with economic issues, the regime’s priority is not economic recovery but shoring up its finances, aggressively extracting money from the public.

“The result is that many people simply won’t want to do business anymore. It’s a short-sighted solution that sacrifices long-term interests, but the regime isn’t thinking that far ahead,” Wen concluded.

Concentrated Conflict Could Lead to Collapse of the CCP Regime

Li Mengju predicts that this "cutting down the wealthy" trend will worsen, creating a vicious cycle. Many businesses won’t be able to sustain themselves, and legal tax revenue will continue to decrease.

“An increasing number of Chinese companies are moving to Southeast Asia, including not just Chinese-owned businesses but also Taiwanese and foreign-owned firms. People have come to realize that China’s growth won’t be what it was over the past two decades, and even assets are at risk since China remains one of the last communist regimes in the world.”

Li believes that if Trump returns to office and reinstates tariffs, China’s economy will further decline. If there’s no recovery within two or three years, these overseas Chinese investors' domestic assets will be at serious risk, as the CCP might seize them for various reasons.

He notes that the CCP spends exorbitant amounts on “stability maintenance” each year, but if financial gaps continue to widen, affecting these maintenance funds, then police and security forces could face unpaid salaries. This could lead to unrest and unpredictable outcomes.

Mr. Wen explains, “There’s an old saying in China: ‘Poverty leads to discord.’ If the economy fails, all conflicts will come to a head. The CCP is bound to fail due to economic issues because the system's primary flaw is economic.”

He adds, “Some compare China to North Korea or the Mao Zedong era, saying poverty didn’t cause significant issues then. But it’s different now. People have seen the light, lived better lives; you can’t force them back into darkness.”

Wen states that if Trump continues the trade war, further blocking China’s economic and technological avenues, the CCP might experience a sudden “snap,” akin to bending wood until it breaks.

Editor: Lin Yan