Chinese local government agencies desperate for new funding
The management of VV Food & Beverage was alerted to this situation. A few weeks ago, the food company, one of the main producers of soy milk in China, received notification of back taxes owed thirty years ago. The tax bureau of Zhijiang, a city in central China where one of the company’s subsidiaries produces alcohol, claimed 85 million yuan (10.8 million euros) for non-payment of a portion of the tax on consumer goods between 1994 and 2009, which had not been claimed before.
The company is not the only one targeted. In Shenzhen, the tech capital, LED screen maker LianTronics was ordered to pay the equivalent of €2.5 million in taxes and slightly more in fines for its 2017 profits. Broker ChinaLin, Ningbo Bohui Petrochemical Group and Zangge Mining have all complained of similar situations in recent months: the tax authorities have been particularly searching far and wide, as if scraping the bottom of a barrel.
As China’s economy, with its property market stalled, struggles to recover from years of the Covid-19 pandemic, the financial accounts of provinces, cities and townships are struggling. While tax authorities deny there is such a nationwide campaign, the level of motivation among local offices tasked with collecting tax arrears is “likely related to the challenges faced by local governments,” said Xing Zhaopeng, an analyst at ANZ Bank.
The slowdown has changed the game
Local governments are going through a difficult time. The era of high-speed urbanization that drove economic progress seems over. Lured by job and education opportunities, many Chinese have moved from the countryside to the cities. To accommodate them, real estate developers have launched large-scale construction projects. In a country where land is state-owned, they have bought the right to use plots of land. These sales, conducted at auction, have been a major source of revenue for city halls and prefectures. In return, they have built the roads, railway stations and schools they need to meet Beijing’s growth targets.
The economic slowdown has changed the rules of the game. Revenue from the transfer of state land accounted for 32% of state revenue in 2020, but only about 25% in 2022, 21% in 2023 and 12% in the first five months of 2024, according to calculations by Dan Wang, chief China economist at Hang Seng Bank. At the same time, business activity has remained less buoyant than before the pandemic, to the detriment of income tax revenue.
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