Tag Archives: tax

Fan Faces Fine

FAN BINGBING, THE film star not seen in public since June, has been fined 883 million yuan ($130 million) for tax evasion and other offences, state media says. She will avoid criminal charges and prison time if she pays up by a year-end deadline.

Unconfirmed reports in Hong Kong said she has also been banned from working as an actress for three years. It would be unusually for such a ban to be announced by authorities in the absence of a conviction.

A contrite posting appeared on Fan’s Weibo account today, although there is still no indication of her whereabouts.

Her agent remains in detention as a broad investigation into entertainment celebrities’ tax affairs continues. Fan was the highest earning Chinese celebrity last year with an income of 300 million yuan, according to Forbes magazine’s reckoning.

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Asian Development Bank Pushes Beijing On Tax Reform

Headquarters of the Asian Development Bank in Manila, Philippines, seen in 2016. Photo credit: ADB. Licenced under Creative Commons CC BY-NC 2.0

CHINA’S ECONOMY WILL grow by 6.6% this year and 6.4% next, according the Asian Development Bank’s newly published Outlook 2018. That is pretty much in line with the most recent revised OECD forecasts from mid-March.

The ADB sees strong consumer spending, rising exports and steady public spending underpinning current growth. It also joins the chorus calling for tax and other structural reforms to ensure that growth is both inclusive and sustainable as it resumes its measured glide path of slowing under the effects of excess-capacity reduction, the gradual resolution of the debt problem and the shift of growth drivers from capital accumulation to total factor productivity, to give a more technical description of the rebalancing of the economy.

In summary, the ADB says:

PRC growth accelerated on strong demand from home and abroad. The service sector grew by 8% on buoyant domestic demand, and net exports expanded as trade in intermediate manufactures rebounded. Assuming mildly tighter monetary and fiscal policies in the PRC, growth is expected to moderate from 6.9% in 2017 to 6.6% in 2018 and 6.4% in 2019. Further progress on reforms such as strengthening financial sector regulation and supervision, and addressing debt issues would lay a foundation for solid macroeconomic stability.

The ADB highlights the importance of services to rebalancing. In 2017, it notes, services were already the main driver of growth, expanding 8%, up from 7.7% the previous year, and contributing 4.0 percentage points to GDP growth. In contrast, industrial growth slowed to 6.1% last year from 2016’s 6.3%, and industry’s contribution fell to 2.5 percentage points.

The services sector also kept the labour market buoyant, creating 13.5 million new urban jobs last year (exceeding the official target of 11 million). But prices in the service sector are rising, meaning that inflation did not cool as much as it might otherwise. Consumer prices rose 1.6% in 2017, against 2% a year earlier. The ADB thinks inflation will pick up this year, to 2.4%, as consumer demand strengthens.

The ADB also notes in passing that services comprise barely 51% of GDP, low by international standards. As investment, in contrast, at almost 40%, is comparatively high, there is ample scope for further ‘rebalancing’.

The risks to the ADB’s forecast are pretty straightforward: a trade war with the United States, which could undercut exports and investment. It is not particularly worried about the tariffs the Trump administration imposed on steel and aluminium imports, seeing an unintended benign consequence of measures to tackle the corporate debt issue:

Prices for aluminum and iron ore (iron being the bulk of stainless steel) rose by 23% in 2017. This raised profits in the producers’ home economies more than enough to offset the impact of tariffs, had they been imposed a year earlier. Profits in heavy industry, including large steel producers in the PRC, rose by 21% in 2017 thanks to higher prices and government-imposed production quotas, allowing these industries to service their debt and reduce borrowing while trying to shed excess capacity. Thus, these producers should be able to manage lower demand expected from the US, given the small share of exports to the US directly affected.

However, it is the United States’ next round of tariffs on Chinese exports of intermediate inputs, especially for renewable energy, electricity generation and electrical and optical equipment, that is the immediate concern as they could undermine the business and consumer optimism. Absent Trump’s ‘massive trade deal’ with China, these will take effect in the next few months and would play directly into investment intentions, and especially those connected to US firms’ links to Asian value chains in manufacturing.

The double risk is that a strengthening dollar on the back of rising US interest rates could also spur greater capital outflows, irrespective of authorities’ discouragement.

However, the ADB believes, the government’s fiscal strength and political will enable the economy to weather any squalls. The question for this Bystander is how stormy the trade can weather get.

The particular area for structural reform tha is exercising the ADB is tax:

[The] ratio of tax revenue to GDP has stagnated at 17.5%, with heavy dependence on indirect taxes in the PRC atypical at its stage of development. The authorities there should broaden the tax base while ensuring that the revenue system is progressive.

The average tax revenue to GPP figure for OECD countries is 25%, and even in the ten emerging economies of the G20 countries, it is 21%. The combination of falling tax revenue and rising expenditure translates into rising budget deficits for Beijing, more public debt and thus contingent liabilities.

The ADB suggests that there is there is substantial potential to raise more revenue from personal income taxes, which are now paid by fewer than one in five wage earners. Personal exemptions are twice the annual average national wage, and the top rate (45%) kicks in at 35 times the annual average national wage. OECD averages are for personal exemptions of one quarter the average annual national wage and top marginal rates starting at four times that level.

This indicates some easy changes that could be made to broaden the income tax base and make it more progressive. (which are in train as was signalled at last month’s National Peoples Congress sessions). Structural tax reform is also central to tackling income inequality, a central concern of the Xi administration.

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China Cuts Income Tax For Low Earners

The reconsideration of income tax on low earners has resulted in the threshold for the tax to be applied being raised by 1,500 yuan ($232), 500 yuan more than originally proposed, and taking an estimated 60 million wage earners out of the tax system. From Sept. 1, tax will start being due on incomes of above 3,500 yuan a month, up from 2,000 yuan a month. In addition the number of tax bands is being cut to seven from nine, with the rate on the first band being cut to 3% from 5%.

The changes lift the threshold above the average monthly wage for salaried workers. The percentage of earners liable for tax will fall to 7.7% from 28%, costing the government 160 billion yuan, according to Wang Jianfan, vice director of the Ministry of Finance’s taxation department. Some of that will be recovered by raising taxes on higher earners. More than 82,000 members of the pubic commented on the original tax cut proposal with two our of three wanting an even higher threshold than finally agreed on.

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China’s Income-Tax Cut Postponed

Proposed income tax cuts that would have taken 50 million people out of having to pay tax have been put on hold. State media’s report of the closing session of the National People’s Congress said the proposal wouldn’t be put to a vote until after more public opinion had been sought and further discussion undertaken. That won’t take place until later this year.

It is highly unusual for the legislature to do anything but rubber stamp legislation put in front of it. The finance ministry had approved, and the State Council signed off on the proposed tax cut, which would have raised the threshold at which income tax kicks in to 3,000 yuan a month from 2,000 yuan a month as part of the broad range of measures to offset the impact of inflation on low- and middle-income Chinese.

Question now is whether this presages a broader range of tax changes to tackle inflation–raising the threshold to 5,000 yuan a month is being talked about along with lessening the number of tax bands at which higher rates start and raising their thresholds, too–and whether some of the additional cost will be clawed back by higher taxes on higher earners. We are also intrigued by where the undermining of the initial proposal lies.

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