Wei Gu
Wei Gu

Slowing economic growth means tax income for the government is dropping, so tax authorities are serious in improving revenue from income tax. Now China earn 6.4% of its income from income tax, compared to 47% in the US. WSJ wealth editor Wei Gu explains what wealthy Chinese and foreigners can expect.

Wei Gu:

Most Chinese already have taxes deducted from payrolls, so they are less likely to be hit by renewed collection efforts. But nonsalary income, investment income or proceeds from stock options, which have become an important source of wealth for Chinese, haven’t been closely tracked.

PricewaterhouseCoopers says many local tax bureaus have started to look more closely at income that comes from stock options and grants this year. Greater attention is also likely to be paid to the overseas assets of wealthy Chinese. China, like the U.S., is one of the few countries in the world that demands tax on citizens’ global incomes, but not many Chinese even know about this policy.

At the G-20 conference in Australia in November, Chinese President Xi Jinping said he wants to improve global tax collection and crack down on tax evasion. It was the first time a top Chinese official had commented on tax issues at a global forum, the State Administration of Taxation said.

Beijing has also shown increasing interest in taking on multinational companies. In November, the official Xinhua news agency reported that a U.S. multinational firm had been ordered to pay the government 840 million yuan ($137 million) in back taxes and interest in what it called China’s largest tax-evasion case. Xinhua didn’t name the company, referring to it as “Company M,” but details it provided about the firm match Microsoft Corp., at least in part. The U.S. software maker neither confirmed nor denied it was the company in the report, saying it works closely with local tax authorities to ensure it complies with the law.

Employees of such companies may be targeted next, tax experts say. Some multinational firms use tax shelters abroad to help Chinese employees reduce their tax burdens, paying staff through their overseas operations, for example.

For Chinese, fines for tax evasion range from half to five times the amount of underpaid taxes. Chinese marginal personal income-tax rates are 45% for income that exceeds 80,000 yuan ($13,000) a month, and 35% for between 55,000 yuan and 80,000 yuan. In Hong Kong, the effective tax rate for high income earners is 15%.

Foreigners who don’t comply with Chinese rules face bigger penalties. In the past, those who were found underpaying their taxes just needed to cough up the difference and pay a small penalty. Starting this year, they may be restricted from leaving China until their back taxes are paid, according to a joint statement by Beijing’s tax authority and police bureau.

Frequent fliers also raise red flags. For example, it is common for global banks to base their senior China bankers in Hong Kong, where the effective tax rate for high earners is 15%, and have them travel to China almost every week. The general view is that if the bankers are in China fewer than 183 days a year, they won’t have to pay taxes. But tax experts caution that the rule is more complicated and that people risk running afoul of it if they aren’t careful.

More in the WSJ.

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