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China Wants Taxes Paid by Citizens Living Afar
Keith Bradsher
5 Hours AgoThe New York Times
As Chinese individuals and companies head overseas in greater numbers, the
country's tax authorities are starting to follow.
The Beijing billionaires who set up cryptically named companies in the
British Virgin Islands to hold their fortunes are in the cross hairs. So are
the Guangdong salesmen living and working in Africa and Latin America.
China's tax officials are now demanding that citizens start reporting
exactly how much money they earn overseas.
In asking for this information, national and municipal tax agencies in China
are quietly beginning to enforce a little-known and widely ignored
regulation: Citizens and companies must pay domestic taxes on their entire
worldwide incomes, not just on what they earn in China.
Read MoreChina goes organic amid food scandals
Shoppers walking along a street in Beijing.
Wang Zhao | AFP | Getty Images
Shoppers walking along a street in Beijing.
The nascent campaign this winter puts China on the same side as the United
States in a global debate over whether taxation should be primarily national
or global. On the other side of the issue are European nations, Japan,
Australia and Canada, all of which tax people within their borders but
exempt most expatriates and overseas subsidiaries from paying income taxes
in their home countries.
"The newest element is the Chinese tax authorities' deciding to more
strictly enforce this worldwide taxation, which has always been required of
Chinese individuals," said Edmund Yang, a PricewaterhouseCoopers partner in
Beijing for international assignments. "The level of compliance among
Chinese nationals overseas has been relatively low."
Economists and accountants have long debated the fairness of taxing citizens
and companies overseas. Europeans have argued that expatriates use fewer
government services, like state-run health care, while playing a big role in
promoting exports.
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College town Worcester now looks the part
Advocates of worldwide taxation have contended that such exemptions are
regressive and hurt lower-income individuals, as many expatriates are
bankers and other high earners in finance. Expatriates may also benefit if
their home countries are prosperous, well-run places with solid tax bases to
which they can return someday.
The roots of China's decision to embrace worldwide taxation trace to the
early 1990s. Still a very poor country then, China sent teams of tax
officials to the United States, Britain, Germany and other nations to seek
advice on drafting a modern tax code.
One team sent to the United States visited state tax officials in California
and New York, said Lili Zheng, a Deloitte accountant who coordinated the
visit and is now co-leader of the firm's Asian international investment
practice. The team paid a long visit to the Internal Revenue Service and was
given a two-volume bound copy of the United States tax code and a five-
volume copy of I.R.S. regulations.
Read More Did China just grant one-of-a-kind trade status?
Chinese officials chose the American definition of income, with its
worldwide scope, in issuing their tax code in 1993. It remains in force
today, although with many amendments.
Now, China is taking the first steps to enforce that broad definition.
The government of Guangzhou, the commercial hub of southeastern China, has
summoned executives from 150 of the largest corporations based there to a
meeting on Jan. 28 to discuss the obligation of their overseas employees to
pay Chinese taxes. Municipal governments in Beijing and other big cities are
also contacting big companies in their jurisdictions and telling them to
provide detailed information on the expatriates' incomes, tax advisers said.
The State Administration of Taxation in Beijing has begun a separate
campaign to curb tax evasion by Chinese companies as they start to make big
overseas investments. New rules taking effect on Feb. 1 will ban a wide
range of international investments deemed to be tax shelters. The rules
could indirectly hit many wealthy Chinese individuals, who commonly make
their overseas investments through specially created companies, often
located in the Caribbean.
Read MoreMore US and less China could be a good thing for Cuba
Worldwide tax enforcement could also prove a potent tool as President Xi
Jingping seeks to catch corrupt officials who have fled overseas.
Enforcement of the tax regulation and compliance has been low partly because
China lacked data on its citizens' overseas earnings and investments. But
the Chinese government has seized on the continuing United States effort to
gather more information on the overseas activities of American companies and
citizens. China has simultaneously been negotiating with the United States
and other countries to share information on overseas bank accounts belonging
to Chinese citizens.
The Chinese tax enforcement effort comes as the country's economy starts to
slow. With overseas investments by Chinese individuals and companies surging
, national tax officials are looking for ways to collect on that trend. And
local governments are seeking to develop a new source of tax revenue to
offset dwindling revenue from other sources.
The finances of local governments across China have deteriorated
considerably in the last two years. Sales of government-owned land to
developers for apartment buildings and office towers have dropped as real
estate prices have fallen and housing starts have tumbled. At the same time,
Beijing has overhauled its system of business taxation to the disadvantage
of local governments.
Read More China's increasing appetite for South Korean entertainment
Local governments used to assess a tax of 5 percent on the revenue of most
businesses in service industries and real estate, and shared part of the
proceeds with the central government. Beijing is phasing out these taxes in
favor of value-added taxes, which go directly to the central government.
That has given municipalities a powerful incentive to step up enforcement of
individual and corporate income taxes, which they still collect and then
split with the central government. Sam Pang, a tax partner at Ernst & Young,
is helping Guangzhou draft a tax enforcement brochure to give companies at
the January meeting.
China's decision could increase pressure for similar action by countries
that face sizable budget deficits and have large numbers of affluent
expatriates, like Australia, Britain, France and Ireland. Although not one
of these countries has shown signs yet of switching to a different model,
there has been a broad increase in interest by governments around the world
in sharing more information on overseas financial accounts.
While China is taking a page from the United States playbook, Beijing's tax
policies in some ways are even tougher.
Read MoreWhy Sony's PS4 won't make it to China this week
The top income tax bracket in China is 45 percent, compared with 35 percent
in the United States. That top bracket for the Chinese kicks in at $12,900 a
month.
The United States also allows expatriates to exempt a slowly rising sum of
foreign earned income, which amounted to $99,200 last year. It then taxes
the rest. In China, overseas citizens are eligible only for an extra
deduction of $210 for each month they are overseas.
Ms. Zheng at Deloitte predicted that China would pursue a few prominent
cases to persuade other Chinese companies and individuals to declare their
overseas income and pay taxes on it.
"The law has always been there — the enforcement has previously been
lacking because of limited resources," she said. "China is going to enforce
some cases to let people know."
Keith Bradsher
5 Hours AgoThe New York Times
As Chinese individuals and companies head overseas in greater numbers, the
country's tax authorities are starting to follow.
The Beijing billionaires who set up cryptically named companies in the
British Virgin Islands to hold their fortunes are in the cross hairs. So are
the Guangdong salesmen living and working in Africa and Latin America.
China's tax officials are now demanding that citizens start reporting
exactly how much money they earn overseas.
In asking for this information, national and municipal tax agencies in China
are quietly beginning to enforce a little-known and widely ignored
regulation: Citizens and companies must pay domestic taxes on their entire
worldwide incomes, not just on what they earn in China.
Read MoreChina goes organic amid food scandals
Shoppers walking along a street in Beijing.
Wang Zhao | AFP | Getty Images
Shoppers walking along a street in Beijing.
The nascent campaign this winter puts China on the same side as the United
States in a global debate over whether taxation should be primarily national
or global. On the other side of the issue are European nations, Japan,
Australia and Canada, all of which tax people within their borders but
exempt most expatriates and overseas subsidiaries from paying income taxes
in their home countries.
"The newest element is the Chinese tax authorities' deciding to more
strictly enforce this worldwide taxation, which has always been required of
Chinese individuals," said Edmund Yang, a PricewaterhouseCoopers partner in
Beijing for international assignments. "The level of compliance among
Chinese nationals overseas has been relatively low."
Economists and accountants have long debated the fairness of taxing citizens
and companies overseas. Europeans have argued that expatriates use fewer
government services, like state-run health care, while playing a big role in
promoting exports.
More from New York Times:
From a pile of dirt, hope for a powerful new antibiotic
Judge overturns California ban on foie gras
College town Worcester now looks the part
Advocates of worldwide taxation have contended that such exemptions are
regressive and hurt lower-income individuals, as many expatriates are
bankers and other high earners in finance. Expatriates may also benefit if
their home countries are prosperous, well-run places with solid tax bases to
which they can return someday.
The roots of China's decision to embrace worldwide taxation trace to the
early 1990s. Still a very poor country then, China sent teams of tax
officials to the United States, Britain, Germany and other nations to seek
advice on drafting a modern tax code.
One team sent to the United States visited state tax officials in California
and New York, said Lili Zheng, a Deloitte accountant who coordinated the
visit and is now co-leader of the firm's Asian international investment
practice. The team paid a long visit to the Internal Revenue Service and was
given a two-volume bound copy of the United States tax code and a five-
volume copy of I.R.S. regulations.
Read More Did China just grant one-of-a-kind trade status?
Chinese officials chose the American definition of income, with its
worldwide scope, in issuing their tax code in 1993. It remains in force
today, although with many amendments.
Now, China is taking the first steps to enforce that broad definition.
The government of Guangzhou, the commercial hub of southeastern China, has
summoned executives from 150 of the largest corporations based there to a
meeting on Jan. 28 to discuss the obligation of their overseas employees to
pay Chinese taxes. Municipal governments in Beijing and other big cities are
also contacting big companies in their jurisdictions and telling them to
provide detailed information on the expatriates' incomes, tax advisers said.
The State Administration of Taxation in Beijing has begun a separate
campaign to curb tax evasion by Chinese companies as they start to make big
overseas investments. New rules taking effect on Feb. 1 will ban a wide
range of international investments deemed to be tax shelters. The rules
could indirectly hit many wealthy Chinese individuals, who commonly make
their overseas investments through specially created companies, often
located in the Caribbean.
Read MoreMore US and less China could be a good thing for Cuba
Worldwide tax enforcement could also prove a potent tool as President Xi
Jingping seeks to catch corrupt officials who have fled overseas.
Enforcement of the tax regulation and compliance has been low partly because
China lacked data on its citizens' overseas earnings and investments. But
the Chinese government has seized on the continuing United States effort to
gather more information on the overseas activities of American companies and
citizens. China has simultaneously been negotiating with the United States
and other countries to share information on overseas bank accounts belonging
to Chinese citizens.
The Chinese tax enforcement effort comes as the country's economy starts to
slow. With overseas investments by Chinese individuals and companies surging
, national tax officials are looking for ways to collect on that trend. And
local governments are seeking to develop a new source of tax revenue to
offset dwindling revenue from other sources.
The finances of local governments across China have deteriorated
considerably in the last two years. Sales of government-owned land to
developers for apartment buildings and office towers have dropped as real
estate prices have fallen and housing starts have tumbled. At the same time,
Beijing has overhauled its system of business taxation to the disadvantage
of local governments.
Read More China's increasing appetite for South Korean entertainment
Local governments used to assess a tax of 5 percent on the revenue of most
businesses in service industries and real estate, and shared part of the
proceeds with the central government. Beijing is phasing out these taxes in
favor of value-added taxes, which go directly to the central government.
That has given municipalities a powerful incentive to step up enforcement of
individual and corporate income taxes, which they still collect and then
split with the central government. Sam Pang, a tax partner at Ernst & Young,
is helping Guangzhou draft a tax enforcement brochure to give companies at
the January meeting.
China's decision could increase pressure for similar action by countries
that face sizable budget deficits and have large numbers of affluent
expatriates, like Australia, Britain, France and Ireland. Although not one
of these countries has shown signs yet of switching to a different model,
there has been a broad increase in interest by governments around the world
in sharing more information on overseas financial accounts.
While China is taking a page from the United States playbook, Beijing's tax
policies in some ways are even tougher.
Read MoreWhy Sony's PS4 won't make it to China this week
The top income tax bracket in China is 45 percent, compared with 35 percent
in the United States. That top bracket for the Chinese kicks in at $12,900 a
month.
The United States also allows expatriates to exempt a slowly rising sum of
foreign earned income, which amounted to $99,200 last year. It then taxes
the rest. In China, overseas citizens are eligible only for an extra
deduction of $210 for each month they are overseas.
Ms. Zheng at Deloitte predicted that China would pursue a few prominent
cases to persuade other Chinese companies and individuals to declare their
overseas income and pay taxes on it.
"The law has always been there — the enforcement has previously been
lacking because of limited resources," she said. "China is going to enforce
some cases to let people know."
