Chinese authorities have started collecting backdated taxes from local companies who still have outstanding payments from the past few decades. This had led to large fines, with some companies being forced to stop production.
The move is seen as a new revenue-raising tactic of the Chinese Communist Party (CCP) as authorities attempt to address local fiscal deficits amid China’s economic woes, as analysts told “Pinnacle View,” a New Tang Dynasty TV commentary program focused on China’s current affairs.
China’s tax system is plunging Chinese small and medium-sized enterprises into an existential crisis, the experts said.
Independent TV producer Li Jun noted that these companies, facing arrears dating back to the 1990s, include a variety of businesses ranging from state-owned enterprises to private companies, listed companies and unlisted companies.
For example, according to Chinese media reports, a controlling subsidiary of VV Food & Beverage (600300. SH) was fined 85 million yuan for unpaid taxes ($11.7 million) dating back 30 years from 1994 to 2009; a real estate development company in Yueyang, Hunan Province, has been fined 900 million yuan ($123.8 million) for unpaid taxes between 2003 and 2020; Zangge Mining (000408. SZ) was sent a bill for 188 million yuan ($25.8 million) for 20 years in tax penalties; Huizhou Taiji Group faces 53 million yuan ($7.3 million) in tax evasion charges from 2000 to 2008; and tax authorities recovered from Hangzhou Yishang Clothing a total of 361 million yuan ($49.67 million) in taxes plus penalties from 2014 to 2021.
Mr. Li believes these cases represent only a small portion of the Chinese companies that have been fined.
He refuted the official statement by the State Taxation Administration on June 18, which said that it has not yet “launched a nationwide or industry-wide tax inspection campaign.” The authority also said it does not intend to “scrutinize corporate tax evasion dating back two or three decades.”
According to the commentator, despite the central tax authority’s denials, some operations have been impacted by the imposition of high back taxes.
“This half a billion yuan is a fatal blow to a medium-sized enterprise.” Mr. Li said.
CCP’s Tax system
Guo Jun, editor-in-chief of Hong Kong Epoch Times, said that if we look back a few decades, the early 1990s was a watershed in China’s tax system.Before 1994, local governments were guaranteed to hand over a certain amount of revenue to the central government, and the rest they could keep. The result was that local governments were rich while the central government was relatively strapped for cash, Ms. Guo said.
In 1994, the communist dictatorship reformed its financial and taxation system, in which the State Taxation Administration and all levels of the local taxation units were set up separately, along with an agreed-upon ratio of interest distribution.
“From then on, this kind of ‘booty-sharing’ system within the CCP enables the central government to get more money and the local governments get less,” Ms. Guo said.
Local collections aren’t enough to cover all areas of responsibility, such as people’s livelihoods, education, social stability maintenance, medical care, retirement and unemployment protection, and more. In 2016, only Guangdong, Shanghai, Beijing, Zhejiang, Jiangsu, Shenzhen, and Fujian were able to cover their expenditures, while all other 30-plus provinces and regions were in the red and in need of centralized financial support.
Local revenues have also been negatively impacted by the economic recession, ongoing health outbreaks of respiratory disease, and the decline in the real estate market over recent years, Ms. Guo said.
“Local income was previously heavily reliant on land sales. However, the real estate crash and the broader financial crisis have revealed a structural problem within the CCP,” she said. “This vicious cycle will persist for some time.”
Therefore, in Ms. Guo’s view, the central government has no funds to subsidize the local authorities, yet it must ensure that the local government is not paralyzed. The only viable solution is to allow the local government to generate revenue from small and medium-sized enterprises.
However, this heavy tax burden on businesses is accelerating the economy’s downward spiral, she said. Enterprises cannot continue to operate if their tax burden is too heavy, so they must close down.
‘Three-Antis and Five-Antis Campaign’
The strict taxation on enterprises is reminiscent of the communists’ “Three-Antis and Five-Antis” campaigns against capitalists in the 1950s, said Mr. Hu, whose grandfather was one of the leaders of Shanghai’s industrial and commercial sector at the time.“My grandfather was forced to hand over his property and business rights. And he did it because if he didn’t hand them over, he could be arrested or killed,” the businessman said.
Three-Anti and Five-Anti Campaigns was a movement launched by then CCP leader Mao Zedong in 1950 and 1951 that targeted business people across the country to redistribute wealth.
“At that time, thousands of business people in Shanghai were arrested, and many chose to take their own lives by jumping from buildings,” Mr. Hu said. “When entrepreneurs had no other option, in 1956, the Communist Party initiated the public-private partnership movement. This involved the Communist Party joining forces with private companies on behalf of the state. After implementing taxation and health redistribution policies, the ruling party gained control of private assets and business operations.”
“The Three-Anti and Five-Anti Campaigns were a complete robbery of the capitalists,” Mr. Hu said.
The same history is repeating itself, he said, “with the CCP’s sword raised over the heads of entrepreneurs, and I’m afraid that in the next two to three years, China will embrace a huge political change.”
