China plans tax reforms to tackle wealth gap

A recent meeting of China's state council has set out guidelines on how the government's policies, including tax measures, will be used in the future to improve income distribution in the country.

During a visit last month to the Ministry of Finance, Chinese Premier Wen Jiabao had already emphasised that the government would have to 'study carefully' all future proposed tax policies, in the medium- and long-term, in order to optimise income distribution with a view to improving ordinary people's living standards.

The State Council called on all national and local government departments and agencies to produce detailed plans on how the guidelines will be implemented.

Listed Chinese companies will have to increase their dividend payments to individual investors, while the country's state-owned enterprises will have to increase payments to the government by around 5% by 2015.

The taxes payable by smaller businesses will be reduced and that was a major reason for the expansion to the VAT pilot scheme last year, and its likely extension across China in 2013.

The VAT reform, replacing the business tax with VAT to provide support to the country's services sector, is primarily aimed at China's SMEs, which account for more than 95% of businesses in China. It is expected that, assuming experience with the pilot scheme progresses as expected, all forms of Chinese turnover taxes will be amalgamated into VAT, possibly by 2015.

It is also planned that wealthier Chinese individuals will be targeted to increase revenue that will, subsequently, be spent on social welfare. In particular, there will be stricter rules on income and asset declarations by government officials, additional consumption taxes will be levied on luxury products and leisure activities, resource taxes will be augmented, and the property tax pilot scheme on high-value houses will be extended gradually. There will also be a study on inheritance tax at an undefined point in the future.

It is also suggested that the exemption from personal income taxes for foreign residents on dividends paid by foreign-funded enterprises in China, will be withdrawn.

For analysis on the state of the Chinese accountancy market, read our exclusive interview with Dr Chen Yugui, head of the Chinese Institute of CPAs (CICPA). Click HERE

Sharon Khin |Specialist tax writer and solicitor

Sharon is a qualified solicitor of the Supreme Court of NSW, Australia and previously worked at Deloitte specialising in advising fi...

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