China Gets Serious in the Fight Against Tax Evasion

March 27, 2014 Posted by China Briefing Reading Time: 3 minutes

SHANGHAI – In yet another sign of China getting serious about boosting its tax revenue, the State Administration of Taxation renewed its pledge to combat tax evasion through heightened international cooperation during a teleconference held on March 18.

Among the targets identified in the accompanying press release, cross-border tax evasion was singled out for more stringent measures to come. The challenge China now faces is how to improve the efficiency of its tax system while remaining competitive for international investors.

China has reason to be worried about tax evasion. By some estimates, the country is losing US$134 billion in tax revenue annually. The largest leaks in the system – and those receiving the most attention from policymakers – are unreported transactions in the Chinese domestic market and disguised capital transfers to tax havens. While in recent years measures to combat the former have met with mixed success, there are signs that tax loopholes for both “non-resident enterprises” and Chinese domestic companies’ overseas operations are quickly closing up.

Observers commonly point to the ongoing prevalence of the cash economy in China as enabling underreporting for the purpose of tax evasion. In response to this, over the last two decades China has spread the use of “receipt lottos,” in which receipts for everyday transactions double as lottery tickets, such that today the system is active nationwide.

Using the prospect of prize money to motivate customers to request receipts from their local businesses, the lottery system recovers enough tax revenue to remain profitable, despite the added cost of lottery payouts. It was adopted after an earlier campaign to distribute standardized receipt printers to businesses failed, with business owners simply refusing to use them.

In addition to these measures to recover tax revenue from the domestic economy, last week’s teleconference also made clear the significant role international cooperation will play in China’s next phase of tax policy.

In 2013, China became the last G20 nation – and one of fifty-six signees – to ratify an international convention against tax evasion via the use of tax havens, and exchanged tax information with some forty-six countries. At the same time, Chinese policymakers have been working to eliminate double taxation – reportedly saving businesses RMB21 billion (US$3.38 billion) in 2013, especially for Hong Kong and Macau-based companies.

Both the lottery system and China’s turn toward international cooperation illustrate the emphasis being placed on the “informatization” of the tax system. And figures show that the plan is working: taxes collected from non-resident enterprises have more than tripled since 2008, to RMB117.2 billion (US$18.9 billion) in 2013.

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