New tech can help curb tax evasion

Apublic outcry over tax evasion and avoidance in China’s film and TV industry has brought into question the efficacy of a tax system that is supposed to redistribute income across the country, where there is a growing divide between the rich and poor.

Tougher rules could be introduced to crack down on tax evasion, which could involve heavier penalties for evaders, larger rewards for tax fraud whistleblowers and better technology to improve the tax system. But more must be done to ensure a reasonable, balanced primary distribution of income.

Cui Yongyuan, a former host for State broadcasting known for his outspoken comments, recently uncovered a practice that’s rampant in the film industry – signing of so-called yin-yang contracts to evade taxes. According to images of two contracts posted on Cui’s Weibo account, believed to be signed by X-Men actress Fan Bingbing, the star was to be paid 10 million yuan ($1.56 million) under one version of the contract shown to tax authorities. A confidential version, however, had a fee of 50 million yuan.

Fan’s studio dismissed any claims of tax evasion. Still, the revelation quickly made the rounds on social media and sparked public anger, pushing tax authorities to probe the dual-contract issue. For average Chinese taxpayers, who face a monthly personal income tax threshold of 3,500 yuan, tax evasion by lavishly paid celebrities is unforgivable.

Data from the Ministry of Finance showed that tax revenues, making up the bulk of China’s fiscal revenues, rose by 16.5 percent to 6.09 trillion yuan in the first four months of the year. Of the total, revenues from personal income taxes jumped 20.8 percent to 573.5 billion yuan, while corporate income tax revenues rose 13 percent to 1.37 trillion yuan.

Other categories include value added tax, consumption tax, export tax rebates, city maintenance and construction tax, vehicle purchase tax and stamp duties.

Tax revenue grew far faster than China’s economy, which expanded 6.8 percent in the first quarter, or average per capita disposable incomes, which rose 6.6 percent in real terms in the first quarter, according to official data.

It appears that while film and TV stars aren’t paying their fair share of taxes, honest but ordinary people have no choice.

More strikingly, there have been media reports that two lesser-known cities – Khorgas in Northwest China’s Xinjiang Uyghur Autonomous Region and Xinyi in East China’s Jiangsu Province – are tax havens for entertainment industry players. Thousands of film and TV studios are registered in these cities, lured by local preferential tax policies.

In the case of Khorgas, companies registered between 2010 and 2020 in the city’s economic development zone, which are considered to be in the sectors encouraged by the autonomous region, were exempted from paying corporate income taxes in their first five years. For the second five years, there was a tax cut of about 50 percent. Also, the city offered to refund 90 percent of local personal income taxes. Amid the national crackdown, Khorgas reportedly considered scaling back these tax breaks.

But it’s ironic that Chinese moviegoers, who have paid for the country’s cinema industry boom, have unintentionally put themselves at the bottom of the wealth pyramid. This has to stop.

For there to be an effective clampdown on tax evasion, which appears to be especially rampant in the film industry, the authorities should consider harsher action such as heftier fines and criminal penalties for evaders.

It also makes sense for the authorities to increase the rewards for tax evasion and fraud whistleblowers. Currently, these informants, who must usually provide their real names, can get as much as 10 percent of the underpaid amount, generally capped at 100,000 yuan. It’s hardly worth the risk. By comparison, informants reporting tax fraud in the US can receive up to 15 percent of the amount that has been evaded, with a maximum reward of $10 million.

Furthermore, new technologies such as blockchain can be used to battle tax evasion, and there’s already been some action in this regard. For example, Chinese internet behemoth Tencent has teamed up with the tax authority of Shenzhen, South China’s Guangdong Province, to establish an intelligent tax innovation lab that leverages blockchain, cloud computing, artificial intelligence and big data to build a smart firewall against tax fraud. Other cities could follow suit.

Such efforts can help the tax system play its proper role in redistributing income. That said, an even more difficult undertaking would be to create an effective mechanism for the society to have a more balanced first income distribution. That will be a more fundamental solution to China’s widening rich-poor gap.

Perhaps it’s time for second thoughts on local government policies such as the tax breaks offered by Khorgas and Xinyi. Thinking more broadly, the national property boom has substantially increased wealth inequality. Also, the fact that fiscal revenue growth greatly outpaces expansion in both GDP and per capita disposable income should prompt broad-based action to rebalance the economy to achieve more equal growth.

But more must be done to ensure a reasonable, balanced primary distribution of income.