Beijing prepares to tax the rich, takes ‘special management stakes’ in tech firms to strengthen societal control amid developing crises

     SinoInsight  1     

Businesses, investors, and China watchers who have been scrutinizing Xi Jinping’s 20th Party Congress work report are alarmed by what they believe is an effort by Xi to reimpose Mao-era economic and social controls in the PRC. Xi’s ideological focus aside, observers are concerned by his plans to promote “common prosperity.”

In his 20th Party Congress work report, Xi said that “the system of income distribution is the foundational system for promoting common prosperity.” He also called for “enhancing the roles of taxation, social security, and transfer payments in regulating income distribution,” “improving the personal income tax system and keeping income distribution and the means of accumulating wealth well-regulated,” and “protecting lawful income, adjusting excessing income, and prohibiting illicit income.” Some observers believe that Xi’s proposed “improvements” to the income distribution system signal a new round of crackdowns against “capitalist roaders,” or wealthy individuals and businesses.

Fears of Xi’s “income distribution system” were stoked recently after the contents of a tax industry seminar were circulated on Chinese social media on Nov. 6. The seminar said that the CCP is setting up a “high net worth individuals administration” (高淨值人群管理局) to launch special tax audits targeting those with 10 million yuan or more in their bank accounts. The seminar also said that the Golden Tax IV system will use artificial intelligence (AI) to collect information on each taxpayer and make corresponding big data blocks of “taxpayer portraits.” The Golden Tax IV system will also target those who are looking to evade taxes through migration; everyone who wants to leave China must first obtain a tax clearance certificate from the tax authorities.

Golden Tax is the PRC government’s tax collection and management system that was launched in the 1990s. The third phase of the system (Golden Tax III) integrated national and local tax data, as well as fully monitored the business taxation process. Golden Tax IV, the fourth phase of the system, is scheduled to be completed by the end of 2022 and will use AI, big data, and cloud technologies to more comprehensively monitor business activities and catch tax evaders. According to publicly available information, Golden Tax IV will target so-called “non-tax” services (i.e. people selling good or products on WeChat and other mobile payment apps but are not registered as a business), establish tax identification numbers for individuals, introduce tax evasion clauses for individuals, and make more “transparent” the income and assets of high net worth individuals.

High net worth individuals refer to those with investable assets of 10 million yuan and more, or $1 million and above. Aside from conventional entrepreneurs and corporate executives, online streamers, e-commerce influencers, internet celebrities, and other individuals with less conventional occupations have also become high net worth individuals in recent years. Currently, provincial and municipal tax authorities are responsible for making sure that high net worth individuals are properly taxed.

The CCP authorities have issued several policies and measures targeting high net worth individuals in the past two years. The authorities are also recruiting a large number of civil servants into the tax system. Noteworthy developments include:

March 2021: The CCP and State Council General Office issued an opinion on further deepening the reform of tax collection and administration (關於進一步深化稅收徵管改革的意見). The opinion requires the authorities to more precisely implement tax supervision, including increasing the frequency of spot checks on industries, regions, and groups with tax evasion problems. The opinion further called for construction of preventive systems to target tax evasion methods such as concealment of income, false reporting of costs, profit transfers, and the use of “tax depressions” such as “yin-yang contracts” and affiliated transactions. The authorities should also strengthen their tax supervision, inspection, and evasion prevention and control measures.

June 21, 2022: The State Council’s audit report on the central government budget and other fiscal revenues and expenditures in 2021 (國務院關於2021年度中央預算執行和其他財政收支的審計工作報告) found that 544 high-income individuals in 22 provinces and cities concealed their income and carried out other measures from 2018 to 2021 to avoid being 4.722 billion yuan in taxes. Also, the local authorities of 22 counties in 10 provinces were found to have illegally returned taxes to high-income individuals under the guise of “financial support funds” despite efforts by the central government to investigate and punish tax evasion.

July 25, 2022: The Supreme People’s Court issued an opinion on providing judicial services and protection for accelerating the construction of a “unified national market” (最高人民法院關於為加快建設全國統一大市場提供司法服務和保障的意見). The opinion markedly toughened the penalties for tax evasion using “yin-yang contracts” and tax evasion by high net worth individuals in the entertainment industry.

Sept. 22, 2022: The Hainan provincial tax authorities and market regulation administration jointly carried out a so-called “two random, one open” (雙隨機 一公開, or randomly selected law enforcement officials inspecting randomly selected targets, plus better inter-government agency communication and cooperation) inspection of those with high income and high net worth in the province. The authorities selected 50 random targets for a comprehensive audit that concluded on Oct. 9, 2022.

Oct. 24, 2022: The National Civil Service Administration published on its website an announcement about civil service examinations in 2023 (中央機關及其直屬機構2023年度考試錄用公務員公告). The announcement noted that the authorities plan to recruit 37,100 civil servants in 2023, an 18.7 percent increase from a year ago. Of the 37,100 new recruits, 25,000 are slated to join the tax system (an increase of 19.9 percent year-on-year), or 67.3 percent of total recruits; this is compared with 64 percent for 2022.

OUR TAKE
1. Xi Jinping’s taxation plan is part of the CCP’s ideologically-driven, long-term effort to establish a techno-totalitarian regime and consolidate its stranglehold on Chinese society. The Golden Tax system and its latest AI and big data-powered fourth phase appear to be the tax-specific counterpart to the “Golden Shield” project (the “Great Firewall of China” is under this) used by the public security system to carry out high-tech surveillance, “stability maintenance,” and censorship work. And like Golden Shield, Golden Tax was first established under former Party boss Jiang Zemin, whom many observers mistakenly believe to be “liberal” and “reform-minded” (particularly in comparison to Xi).

As we wrote previously, “The notion that there are ‘moderates’ or ‘reformers’ in the CCP elite is a misnomer since Party leaders differ only in their chosen approach to actualizing the Marxist-Leninist regime’s ultimate goal of world domination, as well as in their personal circumstances in the factional struggle. So-called ‘liberal’ and ‘moderate’ Party leaders like Deng and Jiang never untethered themselves from communist ideology and also worked to advance the Party’s domination agenda, albeit through the strategy of ‘hiding strength, biding time’ (韜光養晦). The ‘moderate collective leadership’ of yesteryears created the ‘Great Firewall of China’ that bifurcated the global internet; began the PRC’s military build-up; used the pretext of the 2009 Urumqi riots to start the persecution campaign against Uyghur Muslims; forcibly harvested the organs of Falun Gong practitioners and other prisoners of conscience; perpetuated the persecution of Tibetan Buddhists, House Christians, and other religious believers; and more pertinently for today, covered up the spread of the SARS coronavirus in 2003 and commenced coronavirus research that may have culminated in the SARS-CoV-2 pandemic (assuming the ‘lab leak’ theory is the more probable explanation for the COVID outbreak).”

We also noted that “Xi is a symptom, and not an aberration, of the Party system. Because the CCP’s cutthroat political culture does not lend itself to change, Xi’s successors, far from ‘reforming’ the Party, could ultimately prove to be just as willing—if not politically obliged—to continue in the same pernicious cycle of expanding regime power and human rights abuse.”

Businesses, investors, and governments are increasingly recognizing the CCP regime for what it is and accounting for its ideological nature in assessing the PRC and the political risks of doing business in and with China. This phenomenon will in turn heighten political risks in the mainland and for Beijing.

2. Xi stepping up the CCP’s techno-totalitarian approach to taxation is a double-edged sword and increases his and the regime’s vulnerabilities.

On the one hand, the completion and roll out of Golden Tax IV allows Xi to further centralize control and more effectively carry out his “self-revolution” campaign to save the regime. Xi will be able to better take his efforts to clean up the financial sector into “deep water territory” and oust corrupt individuals or groups (especially those linked with his factional rivals) who attempt to evade paying taxes. Beijing would also be able to better restrict outflows, keep the wealthy elites honest and make it hard for them to leave the country, and reduce the threat of capital to the CCP regime. Further, the Xi leadership would be to secure more taxation revenue to replenish the government’s depleted coffers and tide the regime through increasingly tough times. Finally, Xi can use the Golden Tax IV system to keep his remaining political rivals, would-be opponents, rank-and-file officials, and the wealthy Chinese elite in check; those considering standing up to Xi will be forced to think twice lest they are tripped up on “tax evasion” charges (whether genuine or trumped up), and more officials will have “incentive” to be loyal to Xi or face the tax man.

On the flipside, Xi Jinping risks further alienating virtually everyone in China—Party elites, rank-and-file officials, wealthy elites, entertainers, e-commerce influencers, and taxpaying commoners who are struggling to find alternative means of earning a living. Fear of Xi and an intrusive high-tech taxation system, as well as greater anger towards Beijing, will worsen social instability at the ground level and inspire an increasingly despairing elite to try desperate measures to resolve the “Xi Jinping problem.” Meanwhile, the wealthy elites could step up their exodus from China before the Xi leadership has a chance to more fully put in place Golden Tax IV and even after.

3. Beijing’s attempt to tax high net worth individuals is yet another indirect sign that the CCP authorities are seeing severe financial shortages. While the Xi leadership may be able to recover some much-needed funds through taxing the rich, it risks killing the goose that lays the golden egg in the name of income redistribution and “common prosperity.” High net worth individuals have vested interests in defending the CCP regime that allowed them to make their wealth, but could quickly be disinclined to support the regime (including by voting with their feet) when the Party increasingly sacrifices their interests. There are numerous examples in Chinese imperial history of the court taxing the elites to preserve the dynasty, only for the court to lose the support of the elites and hasten the end of the dynasty.

According to the 2021 Hurun Report on high net worth individuals and families in China, there are:

• 2.02 million “high net worth families” with net assets of 10 million yuan;
• 130,000 “ultra high net worth families” with net assets of 100 million yuan;
• 77,000 “ultra high net worth families” with investable assets of 100 million yuan;
• 54,000 “international ultra high net worth families” with investable assets of $30 million.

Many wealthy Chinese tend to have permanent residency abroad and are prone to migrating. Beijing’s “special tax audit” and other measures to ensure that the rich pay their “fair share” of taxes will only exacerbate the exodus of wealthy Chinese leaving the mainland and capital flight.

4. Economic activity in China could be further curbed as businesses and funds come under greater scrutiny with the Golden Tax IV system. More people could also prefer to cut down on electronic payments in favor of cash. As the cash holdings of individuals increase, banks could see reduced liquidity and credit capacity. The CCP’s rollout of the digital renminbi could also take a hit.

Meanwhile, businesses that rely on tax evasion to maintain meager profit margins could be forced to declare bankruptcy and shut down as the high-tech Golden Tax IV system and tougher laws make dodging taxes nearly impossible. This phenomenon will frighten way foreign investors and convince even more high net worth individuals to withdraw from China.

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