Tax Man Scurries in China's Fiscal Squeeze

飞雪寒冰

Top executives from several state-owned enterprises recently sat face-to-face with government tax collectors at the Beijing headquarters of the State Administration of Taxation Inspection Bureau.

At the meeting, which marked a critical phase for an ongoing nationwide tax audit, the executives were politely reminded to pay up.

The audit began in April but started widening after a dramatic slowdown in monthly receipts became apparent in the second quarter, suggesting that the government's fiscal revenue target for 2009 may be impossible to meet.

At the beginning of the year, the government called for an 8.2 percent increase in national tax collections in 2009. Beijing also set a two-pronged goal to increase national GDP and fiscal income 8 percent each this year.

At the start of the fourth quarter, the GDP goal appeared to be reachable. But not the tax target; the government said tax revenues had fallen 10.3 percent in the first quarter 2009 and 6 percent in the first half, year-on-year.

Tax officials responded to the revenue slide by trying new ways to boost collections. Meeting major enterprise executives in person was one approach. Another step may involve closer scrutiny of company books over the next couple of months.

Heightened tax inspections are coming at a tough time for many Chinese enterprises already pressured by the global economic downturn. Yet some experts say any change in government targets for tax revenue growth could put even more stress on an economy now heavily influenced by government fiscal stimulus

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Balancing Act

Despite the downturn, the government has shown no interest in letting its budget deficit climb this year. Instead, it's made strengthening taxation a priority.

The strategy has created some friction. On one hand, the government has increased nationwide tax audits. But it's also initiated structural tax deductions to help companies weather the business slump.

The government adopted an aggressive fiscal policy this year that combined expanded government investment with bigger tax deductions for companies.

As part of its enormous, 4 trillion yuan economic stimulus package, for example, the central government this year issued 750 billion yuan in state bonds and another 200 billion yuan in bonds on behalf of local governments. Public investment increased by 487.5 billion yuan.

Meanwhile, Minister of Finance Xie Xuren proposed September 9 a policy to reduce or waive taxes. At the same time, it was announced that the export tax rebate ratio would be raised. These moves were expected to shrink 2009 fiscal revenues by 550 billion yuan.

The friction softened in August when it seemed the tax audit process was starting to pay off. For that month, year-on-year fiscal income for all governments nationwide grew 36 percent, while central government fiscal income rose 51 percent, thanks to more stringent tax inspection.

The good news in August helped fiscal income growth rates turn a corner and post a 2.6 percent increase for the first eight months of the year.

But hitting the government's 8.2 percent growth target for the year will require a far bigger lift for fiscal income. Indeed, to meet the goal average tax collections will have to rise more than 22.5 percent every month from September to December – an unlikely feat.

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Aggressive Action

The state tax administration recently released a circular outlining a 20-point strategy that left no doubt about the seriousness of the revenue-boosting task. The circular -- Further Strengthening Tax Collection, and a Number of Specific Measures – declared that this year's tax revenue target "must be realized."

The strategy marked a slight departure from the norm for tax collecting in China. In the past, companies enjoyed some flexibility in payments, sometimes deviating from strict interpretations of the rules. Individual discretion could be used to guide major taxpayers.

Before the latest adjustments, Chinese companies paid a 33 percent income tax. Other national taxes include a 17 percent value-added tax and a personal income tax as high as 45 percent.

Experts think China's overall taxation level is above average on an international scale. But Liu Huan, associate dean of the College of Taxation at the Central University of Finance, said in fact actual tax collections have been lower in China than in many countries.

"For example, in the past we said that we collected a 33 percent tax," Liu said. "But 20 percent was actually collected, or even not that much."

Tian Wen-qi, a tax expert at Ernst & Young, said the latest inspection process differs from what was done in previous years. This time, inspectors are using a nationwide, joint investigation method by coordinating various branches of the tax administration bureau around the country. If one division of a company is cited for tax evasion in one part of the country, all tax bureau offices will work together to investigate each regional company branch.

And taxpayers are less likely to bend the rules now that nuts and bolts of revenue collecting have improved. China's electronic tax reporting system and more professionalism at tax bureaus are two examples of improvements.

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Limited Advantage

Meanwhile, the government's recent tax breaks have had a only minor impact for many companies. Although the Ministry of Finance said the structural tax reduction policy would cut taxes by about 550 billion yuan, the overall effects are not as significant.

For example, Liu said, implementations for many preferential policies have fallen behind schedule. High-tech enterprises around the country that are eligible for tax breaks have yet to be identified. And other company taxpayers have yet to benefit from the policy.

Private and small- to medium-sized enterprises are at a disadvantage as well compared with their larger, state-owned counterparts. Smaller firms have limited access to resources that bolster bigger firms, regardless of tax burdens.

In a crisis, state-owned enterprises can obtain special government support by, for example, winning government investment contracts and enjoying easier access to bank loans. They also can tap tax incentives and government programs for industrial innovation. Big enterprises also are more likely to audit their own taxes.

If taxes are too high, the taxation system and policies should be adjusted, said Xu Shanda, a former deputy bureau chief of the state tax administration and member of the CPPCC National Committee. But the actual tax collection process should follow the letter of the law without being relaxed, he said.

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Fiscal Fix?

The fact that this year's fiscal revenue growth has lagged behind the economy's growth should not raise a red flag, said Ni Hongri, an official at the State Council's Development Research Center.

China's dependence on foreign trade contributed to falling revenues this year, prompting the government to raise export tax rebates more than once, which in turn led to steeper declines for revenues than economic growth.

Should the government reduce spending to offset lower revenues? Or could it tap its savings account?

The Ministry of Finance has repeatedly stressed that realizing the fiscal income goal for 2009 is putting enormous pressure on spending. Yet central government deposits at the central bank are plentiful. At the end August, for example, its deposits totaled roughly 2.9 trillion yuan.

The finance ministry tries to explain the fat bank account from a technical perspective, pointing to special characteristics of the Chinese accounting system. But, fundamentally, fiscal revenues have been increasing every year at a faster rate than expenditures.

Some observers wonder whether the government's budget can be adjusted in ways that neither widen the deficit nor force tax collectors to work harder.

Zhang Musheng, publisher of China Taxation Magazine, noted that the government owns more than 4 million autos. The fleet costs several hundred billion yuan to operate every year.

In addition, more than 17,000 offices for local governments, semi-official enterprises and universities are scattered around Beijing. The government also finances a vast number of training centers, some luxurious.

"If we can get rid of these, we can easily save 400 to 500 billion yuan," Zhang said.

Administration has been cited as another area for spending cuts. The percentage of fiscal spending earmarked for administrative expenditures increased to 18.3 percent in 2006 from 4.7 percent in 1978.

Perhaps improving the government's fiscal status need not solely rely on squeezing Chinese companies for more taxes. But for now, the tax man is taking the lead in the scramble for revenue targets.