[PEN-L:31509] China's tax code

["Ian Murray" <seamus2001@xxxxxxxxx>]

China's Wealthy Facing Income Tax Crackdown

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, October 22, 2002; Page E01


CHENGDU, China -- The richest man in China oversees more than 70 companies
in the banking, real estate and livestock feed industries. He greets
visitors beneath crystal chandeliers in the marble lobby of his villa at
Jinguan New City, a complex of 200 Mediterranean-style homes that he built
here in southwestern China for $120 million. A silver Mercedes waits to
whisk him to the airport for his flights to Shanghai, where he is putting up
a similar development.

But while Liu Yonghao, chairman of the New Hope Group, has managed to erect
and supervise the pieces of his complex commercial empire, he has until
recently been flummoxed, he says, by a more pedestrian piece of his life:
the personal income tax code.

"I wasn't very clear about that, paying personal income taxes," Liu said
during a recent interview here in the capital of Sichuan province. "We were
kind of vague on personal income taxes and didn't pay much. We weren't doing
a very good job."

He could well have been speaking for the entirety of this country's
burgeoning ranks of ultra-wealthy people. The government is fond of pointing
to China's towering skylines and fast-growing economy as signs that its
market reforms have modernized the world's most populous country. But
there's another side of China's growing affluence: The most successful
people in the People's Republic of China generally don't pay income taxes.

Of the roughly $180 billion the government collected in taxes last year,
personal income taxes accounted for only $12 billion, or about 6.5 percent
of the total. In most developed countries, such taxes make up about 28
percent of the total, experts say. In the United States, the figure is about
30 percent. When Forbes magazine published a list of China's richest people
in 2000, only four of them also popped up on a list of the country's 50
largest private taxpayers, according to a recent report in the Jinghua
Times, a government-run Beijing newspaper.

Government officials in Beijing are increasingly concerned about tax
evasion -- both as an emblem of a system that many people see as corrupt and
as a troublesome fiscal problem: The government needs the money.

Under promises China made to gain entry to the World Trade Organization last
year, it must roll back protective tariffs, forgoing past sources of
revenue. At the same time, the government needs funds to establish pension
and social welfare systems to replace housing, health-care and retirement
benefits once provided by now-failing companies owned by the government. The
demise of these social services has fueled protests, particularly in rural
areas.

In a speech in July, China's reformist prime minister, Zhu Rongji, thundered
about a report in state media showing that the richest 20 percent of the
country's population holds 80 percent of its $850 billion in savings, while
its income taxes amount to only about 10 percent of all income taxes.

The speech added fuel to an ongoing state crackdown on tax evasion. A report
from China's official New China News Agency said authorities in Beijing have
put together lists of those who earn more than $12,000 annually, with the
top 100 earners in each area set for special scrutiny.

In June, police arrested Liu Xiaoqing, a once-glittering film star who
stands as China's 45th-richest person, according to Forbes, charging her
with hiding income. She was led away from her Beijing villa in handcuffs.
The widely publicized incident served as a kind of warning shot to the
wealthy.

Then earlier this month, police in the northern city of Shenyang detained
another of China's richest people, Yang Bin, who has built his fortune in
the orchid trade, on suspicion of illegal activities, including suspected
tax evasion.

The tax-evasion problem feeds perceptions that communist China is run for
the benefit of the privileged while neglecting ordinary people -- this, at a
time when the gap between rich and poor is as great as anywhere in the
world.

China's cities are scenes of extraordinary contrast between lifestyles of
extravagant plenty and dire poverty, which still defines the days of
hundreds of millions of Chinese. On a lane in downtown Shanghai, a man who
gave his name only as Wu squatted against a brick wall, patching a bicycle
tire beneath laundry lines flapping in the breeze. He pumped up another tire
and collected 5 cents for his work. His shirt was worn down to holes. The
laces on his sneakers were broken and tied together again. A question about
rich people and taxes brought a shrug.

"They don't accept a feeling of responsibility for the country," he said.
"They're selfish. The whole system has loopholes."

Twenty paces away, on a leafy street around the corner, customers inspected
tapestries from Thailand and French candles that sold for more than $50 in
one of the city's proliferating housewares boutiques, as the sound system
pumped out a Brazilian samba. A clerk there -- a 23-year-old woman who goes
by the name Coco -- called the tax-evasion problem symptomatic of an
essentially rotten system that has trained Chinese people to pursue their
personal interests above all else, banishing talk of collective good as so
much leftover propaganda.

"Every year, I have to go down to the local police station to extend my
driver's license," she said. "I personally spend a day and a half there,
taking required traffic safety classes. But I see rich people come in, pay a
bit of money and they're done. They don't even have to go inside the
classroom. Why should I go there? It's unfair."

Taxes, she said, are the same. "In China, we have a lot of back doors.
Basically, doing things according to regulations is for people who don't
have a back door."

For China's leaders, this increasingly widespread view of how things work is
a threat to the country's stability, particularly as economic reforms
shutter inefficient factories and throw people out of work while depressing
incomes among farming families.

"It used to be that everybody had the same income, but now there's no
balance anymore," said Qian Cheng, a taxation expert at People's University
of China in Beijing. "One group can make a fortune. The income tax code is
the government's way of restoring the balance. But ordinary people are
paying taxes, and rich people are avoiding it. It's just simply not fair."

Even as the government makes tax collection a high priority, a culture of
evasion, ignorance about the system and loopholes in the law make it a
difficult problem to solve, according to experts. China has only had an
individual income tax since 1980. Before that, the very notion of individual
income was anathema to a communist country that was, at least nominally,
built on collective labor to serve the collective good.

Recent years have seen the emergence of a new class of private
entrepreneurs, whose profits have become a key source of government revenue.
In 1993, the government collected a mere $567 million in personal income
taxes, but that number has grown annually by an average of 48 percent since.

Poor people -- generally, those who earn less than $97 a month -- do not
have to pay income taxes. Because the threshold is set by local governments
that then collect taxes and pass them on to the central government, no
reliable data exist on how many people do not have to pay, but it is clearly
hundreds of millions, experts say. Those above the monthly threshold must
pay taxes on a scale that ranges from 5 to 45 percent.

Most people have no choice in paying: Their employers withhold taxes.
According to statistics from the State Administration of Taxation, in 2000,
90 percent of China's individual income taxes came from wage earners and
self-employed people.

But the rich, especially those who run their own companies, have many ways
to avoid tax. They typically are paid tiny salaries by their companies to
hold down income, while their companies provide their houses, cars, clothes
and fancy restaurant meals.

"Among the wealthy people, it's quite widespread," said Lewis Lu, a senior
manager at the Shanghai office of KPMG LLP, the global accounting giant.

Liu Yonghao -- whose family business has assets worth about $1 billion,
according to Forbes -- was for years an expert practitioner of this
approach. In the interview here in Chengdu, he said he never used to
differentiate between company money and personal money. Still, he carefully
added, he has always followed the rules.

"I paid taxes based on my salary," he said, describing that amount as "no
fixed number." When pressed, he added: "Last year, my salary was not very
much."

Then came the ominous talk from the government about the rich avoiding their
duty to society. Liu said that last year he started paying himself a regular
salary of about $102,000 a year, but he declined to be more specific. He
also would not discuss reports in the Chinese press that in the first half
of this year he had become one of China's largest individual taxpayers,
handing the government about $120,000. Some reports have said he stepped
forward and admitted responsibility for avoiding taxes in the past and had
made a large one-time payment to cover past obligations, but Liu shot down
such stories, saying only that the issue is "very sensitive."

Liu eschews fancy clothes. His haircut gives him the windblown look of a
farmer. "I'm not the sort of person who wants a high-paying, luxurious
lifestyle," he said. "My daily costs are very modest, no more than 100 yuan
[about $12]. I work every weekend, and I myself don't own a car."

Conveniently, though, his company does own the Mercedes. It makes the car
available to him whenever he needs to go anywhere. It also provides the
villa at New Jinguan and will probably let him choose one of the villas
being constructed in Shanghai. It owns the golf cart Liu uses to navigate
the grounds here, past the fountain with the marble dolphins to the 18-story
luxury apartment building he likes to show visitors.

"I've always seen my company and my family as one and the same," he said.