China has always had a legal framework for taxation. Why is it now increasing enforcement?
Declining fiscal revenue is prompting tax authorities to scrutinize offshore trusts and equity gains
These shifts in tax enforcement stem from multiple factors, and they mirror a notable shift in the policy mindset of the central government. Here’s what to know about the taxation landscape in China.
The establishment of China’s tax system
China’s unified national tax system took shape in the early 1950s, putting an end to what was then a patchwork of regional tax regimes.
After that, structural flaws embedded within the fiscal framework gradually tipped the balance in favour of provincial authorities – the bulk of tax revenue was accrued by local governments, which left the central government cash-strapped and its budget constrained.
In 1994, against this backdrop, China rolled out its most far-reaching and comprehensive tax overhaul to date. The reform defined categories for both central and local taxes and set up a standardised central-to-local tax rebate mechanism.
Nearly two decades later, in 2012, China rolled out another landmark fiscal transformation: the full replacement of business tax with value-added tax (VAT). Designed to eliminate double taxation and build a more equitable tax environment, the reform eased companies’ tax burdens and expanded their profit margins.