People like to complain that China has abandoned its Communist values in favor of state-directed capitalism. But in at least one way, the rulers of the world’s second-largest economy are adhering to the prescriptions of Karl Marx – with a burdensome progressive income tax.
And as the CPC has imposed new tax cuts to try and pump more fiscal stimulus into the economy to help revive its flagging growth. But wealthy Chinese are worried that the state will expect them to cover the revenue shortfall (particularly as the trade war threatens to sap the Chinese economy of badly needed FDI).
In a country where personal wealth has swelled to $24 trillion since the days of Deng Xiaoping – $1 trillion of which is held abroad – these changes to China’s tax regime could have a resounding impact on asset markets around the world (Vancouver comes to mind).
The changes, which took effect on Jan. 1, have already prompted wealthy Chinese to look into creating overseas trusts that could help them protect their wealth from the state, as China’s decision to embrace the Common Reporting Standard, an international data-sharing agreement that allows governments to more easily track the overseas wealth of their citizens.
Here’s a rundown of how China’s new tax rules might impact wealthy Chinese, and how that in turn might reverberate around the world (text courtesy of Bloomberg):
Crackdown on Havens
Under the new rules, owners of offshore companies will not only pay taxes on dividends they receive but will also face levies of as much as 20 percent on corporate profits, from as low as zero previously. This has triggered a flood of rich families seeking refuge via trusts, which often shield wealthy owners from having to pay taxes unless the trusts hand out dividends. Overseas buildings or shell companies are also becoming easier to track for authorities as China embraces an international data-sharing agreement known as the Common Reporting Standard, or CRS.
It’s not clear how the government will utilize CRS data, especially in early 2019, but authorities may grant amnesty for a certain period for a stable transition or focus on penalizing the biggest offenders,