Taxing the brains

A woman consults a tax officer about filing her income tax declaration in Tong'an local Taxation Bureau in Xiamen, Fujian province.

A picture of basketball superstar Yi Jianlian hit the front page of dozens of Chinese newspapers on February 7, 2007. This time, however, the 7-feet 23-year-old giant was not making one of his patented 3-pointers, but lining up in a local tax office in Dongguan, Guangdong province to file his tax return. "It is a duty for high-income people to pay taxes," he told reporters. "I am quite clear how much I earned last year."

Along with him that day were his teammates and coach, but joining him later were around 1.63 million people across the country last year, the first year China started asking people with annual income of 120,000 yuan or above to file their tax declarations.

Although the number was only a quarter of the previously estimated 6 to 7 million who were up to standard, analysts regard the move a big step forward to build a mature tax-paying system and improve people's awareness of paying taxes.

But to make people comfortable with being taxpayers is not easy anywhere, especially in China where the concept is only 28 years old. China enacted its first law on individual income tax in September 1980, while the forerunner of the United States' income tax bill was enacted in 1862.

Earlier than that, it was 18th century American statesman and inventor Benjamin Franklin who famously wrote: "In this world nothing is certain but death and taxes." Is it already a reality in China?

Threshold

China's first personal income tax law didn't target ordinary wage earners. Setting a monthly income of 800 yuan as the threshold, it excluded almost all ordinary Chinese people. At the time their average monthly salary was around 60 yuan. According to the 1980 Statistics Communiques, the annual salary for urban employees was 762 yuan that year.

Large money earners such as movie stars and pop singers, and of course, foreign senior managers working in multinational companies in China, were the prime targets.

"We had to establish the income tax system then as foreigners began to swarm into China when the country opened up," says Shi Yaobin, director of tax policy department under the Ministry of Finance. "The practice was aimed to safeguard China's sovereignty in taxation while boosting international cooperation."

"The 800 yuan standard was made based on monthly living cost for foreigners then," he told a hearing in Beijing on September 27, 2005 to discuss a possible rise in the cut-off standard.

China collected a negligible 5 million yuan in personal income taxes in 1981, the first year such tax was levied, compared with 318.5 billion yuan in 2007, which accounts for roughly 7 percent of the nation's total tax revenue.

The real pinch for ordinary salaried employees came in 1994, when many were surprised to find a new item - a withholding tax - was deducted from their salaries when they got paid in January.

The move, which analysts say marks the real beginning of a national Chinese income tax, came at a time when incomes jumped in the 1990s with the country's robust economic growth. In big cities such as Beijing, Shanghai and Guangzhou, monthly incomes could easily surpass 800 yuan in the 1990s.

From the very beginning, China has adopted a progressive income tax system, that is, after cutting 800 yuan off for basic living expenses, people pay taxes according to their incomes at different rates - ranging from 5 percent to 45 percent (for monthly incomes of over 100,000 yuan). The more they earn, the more they pay.

According to the Ministry of Finance, in 2000, the disposable income for urban residents was 18.3 times of that in 1978 but the CPI also grew 400 percent in the 22 years. In 1992, only 1 percent of ordinary employees had a monthly income of over 800 yuan while in 2002, the ratio was 52 percent.

The expanded rank of taxpayers has enabled China's income tax revenue to grow at a rate of over 40 per cent since 1994. Tax revenue surged from 7.27 billion yuan that year to 209.4 billon yuan in 2005. The ratio of income tax in the nation's tax revenue rose from 1.6 percent to 6.8 percent during the period.

That triggered mounting calls to raise the 800-yuan standard. "The standard set in 1980 doesn't suit the current situation," says a commentary on The Beijing Times on May 25, 2005. "When it becomes even tough for one to survive on 1,500 yuan a month in big cities like Beijing and Shanghai, should he or she still pay tax? Refusal to change this just reveals the legislative bodies' unwillingness to do something for the people."

Sandwiched by public pressure and the nation's desire to increase tax revenue, the National People's Congress revised the law in August 2005 to raise the cutoff standard to 1,600 yuan, and after a further revision in December 2007, the standard was set on 2,000 yuan starting 2008.

The latest cutoff point will reduce government revenues by 30 billion yuan annually, according to the Ministry of Finance. It will also mean that 70 percent of income earners will be exempted from the tax, against 50 percent now.

Still, it failed to put an end to the debate. Some members and deputies participating the National People's Congress and Chinese People's Political Consultative Conference sessions in March this year in Beijing submitted proposals to raise the cut-off to 5,000 yuan.

More suggest China adopt a taxation system with differential treatment for individuals living in different places, and with or without family to support - which could lead to big gap in their living costs.

Evasion

But income levels have not been the only complaint from the public, as many people believe the state tax bureaus are missing their real targets: celebrities and China's nouveau riche, and that tax evasion has been rampant among them.

In fact, ever since the income tax was launched in China, tax collectors have been trying to keep a sharp eye on stars and private business people.

One big fish they caught was pop singer Mao Amin, who was fined for 600,000 yuan for dodging taxes in 1989 when she was at the summit of her career. The scandal resulted in a heavy blow, sending her to the verge of collapse and a suicide attempt.

In 1996, however, she was caught again, for evading over 1 million yuan in taxes. The second scandal shocked the nation and forced the singer who had millions of fans in China, to go overseas to flee the criticism.

She returned in 2000 but has been unable to make a comeback in a market almost 20 years younger than her.

While Mao was simply fined, another celebrity movie actress Liu Xiaoqing was not as lucky. She was arrested in June 2002 and spent more than a year in jail after her company was charged with dodging 14.58 million in taxes.

Chinese media hailed it as an alert to the wealthy that tax dodging could be "very serious".

"It may send you to jail," said a commentary in China Youth Newspaper in July 2002.

Foreigners working in China also found loopholes in China's incomplete taxation system. Expats who stay more than three months in China have to pay income taxes according to local standards. Some people who are on the payroll of both their headquarters and local operations chose to cover their income from overseas.

Fifty-two foreign staff working in the FAW-Volkswagen joint venture in Changchun, Jilin province were asked to pay back 5.74 million yuan in overdue income taxes in February 2003, according to local media.

Hitting the headlines most recently was Lee Kaifu, president of Google's China operation, who was reported in March to have allegedly evaded personal income taxes of at least 5 million yuan over the past two years. Google refuted the accusation but did admit it missed the tax deadlines as it tried to "consult local authorities".

Tax on stock trading?

However, Googling (or Baiduing) "taxes and China" these days, one might find a hot topic is "will China tax the gains from stock trading?"

In fact, the question has been in the air since 1994. According to the personal income tax law, earnings from stock trading are a form of income from a property transfer and should be taxed at a rate of 20 percent

Rumors and discussions on the possible tax fuelled investor worries in early 1994 and sent the index in a nosedive. The stock plunge forced the Ministry of Finance to announce a suspension of the tax in order to "encourage the development of China's infant stock market."

However, a notice from the State Administration of Taxation in November 2007 re-ignited the concerns of the country's dozens of millions of stock investors. The notice requires people to report their income from stock trading in 2008.

Again, fears of a so-called "capital earning tax" fanned a slump in the stock market, which started to fall in late October, despite the Ministry of Finance's claims that it had no intention of resuming the tax. Tax officials told Xinhua News Agency that the move was simply aimed at building up better database.

Some economists believe it is still too early for China to impose a capital earnings tax, and say regulatory departments should be cautious of applying any new policy that is likely to shock the stock market.

The new requirement didn't daunt people from filing their 2008 tax returns. Although the national figure is yet to be announced, many cities reported sharp increases in the number of tax returns filed this year.

Beijing has reported a 34 percent year-on-year increase in the number of self-declarations by the April 1 deadline, while filings in Tianjin were up by 8,000.

More celebrities joined basketball player Yi Jianlian this year. In Central China's Hunan province, famous TV anchor Wang Han says he is proud to promote filing of income tax declaration. "That is the most meaningful social job I have ever had," he told Changsha Evening News.

(China Daily 04/21/2008 page2)