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Asian Tax Review: South China Autumn

By Laurence E. Lipsher - Email Editor

December

Dear Valued Reader,

Autumn is the time of year when one basks in the glories of being outdoors in the Pearl River Delta. Low humidity and comfortable temperatures are the norm now.

The Asian Games just ended in Guangzhou, and the expenditures on infrastructure that occurred for the games will benefit this city for a long time. The subway system alone is a good example: Tax expenditures went into expanding the 18.5-kilometer route to a 10- line, 236-kilometer system. Guangzhou brilliantly put to use infrastructure expansion expense as part of tax policy.

Focusing on Revenues

China as a whole now has to pay attention to the revenue portions of tax policy in order to deflate rather than burst the many bubbles in this part of the world. There are interesting bubbles here in China, and tax policy might be the only way to deflate them.

One exotic example is caterpillar fungus. According to the November 13 and 14 edition of the Financial Times, caterpillar fungus, used for centuries as an aphrodisiac and to fight fatigue, has gone up in value about 300 percent this past year. One gram of the stuff sells for the same price as two grams of gold!

Last year I wrote a lot about money coming out of China. The true amount of funds illegally siphoned off the top of all of those bank loans made in China last year will never be known. How much future tax revenue will be lost is not even being considered. Actually, the effects of Chinese investment outside China have been felt all over the world, but I believe that the government has simply looked the other way because it really does help reduce and deflate the bubbles elsewhere in China. You can't imagine what the flow of funds coming into this country has been like - it's a huge wave of cash that the central government is having difficulty controlling and for which some draconian tax measures are likely to be the consequence.

Let's face it: China's rather loose monetary policy for the past couple of years, although beneficial, was no different from current U.S. policy, so it cannot truly take a holier than thou stance regarding the U.S.'s sudden monetary influx. There is no proactive tax policy to go along with the U.S.'s monetary policy, which will cause problems in the United States. China is not exempt from a similar problem, but with a single-party system, the country can act a bit faster.

Commercial Real Estate

Foreign investment in commercial real estate will be the first target. Security Times, a Shenzhen-based magazine, reported on November 13 that nationwide restrictions will soon be set in place, limiting foreign investors to purchasing only one piece of commercial property, limited to the location in which that business has its business registration. This is in addition to the already imposed residence acquisition restrictions. This commercial properties program will be administered jointly by the Ministry of Housing and Urban Development and the State Administration of Foreign Exchange. And now the first of the new tax suggestions begins.

On November 24, Xia Bin, an adviser to the People's Bank of China, stated in China Dealmaker magazine that China must now consider levying a Tobin tax on foreign exchange transactions as soon as possible to effectively curb the inflow of hot money into the system. Xia said that China should levy a tax on foreign exchange transactions in the spot market and strictly limit foreign investment in the commercial property sector to curb short-term speculative capital inflows. Xia also suggested that China maintain tighter control over monetary policy, moderately increasing yuan renminbi appreciation only as long as its key industries are taken into account so as not to upset their operating ability. Free trade? Things are starting to sound a bit more protectionist on all sides. Yet China's actions are essentially no different than those taken in South Korea, which is reimposing a 14 percent withholding tax on foreign investors' earnings from government bonds. And Brazil, Indonesia, and Thailand have introduced similar measures.

Hong Kong is getting in on this action, albeit far too little and far too late. According to Chief Executive Donald Tsang, stamp tax duties are now in force, imposing an extra 15 percent as stamp duty for flats bought and sold within six months 10 percent for those sold between six months and a year of ownership and 5 percent for all other properties held under two years. Tsang announced these measures to cure the rapid property price rise in Hong Kong.

I believe this tax will do nothing. It's too small and will be passed on to buyers, who still want to play the Hong Kong market. During the first weekend of the new stamp duties, real estate sales drastically reduced. Housing sales increased somewhat the following weeks. This stamp tax duty will not cause a permanent drop in the Hong Kong housing market. Regardless, it will add to the revenue surplus in Hong Kong's already bulging treasury, with much more tax revenue to come.

South China Morning Post on November 13 wrote that Hong Kong and Taiwan overseas Chinese investors will now have to swear, under penalty of perjury, that they do not own any other property in China when they invest in a single commercial property. This is a lofty goal - getting this law adhered to is going to require a heck of a lot more than just signing a statement. Signing documents is meaningless here - of course Hong Kong or Taiwanese investors will sign a paper stating that they own only one piece of property, because they believe that no one is going to look at the paper or know what they are doing elsewhere in the country.

How are you going to monitor and enforce this without a national data base and a bureaucracy? Frankly, it would be impossible without the State Administration of Taxation (SAT) being involved, because they are the only ones capable of administering a project like this.

It will not be enough to control bubbles in the real estate market, the stock market, or, for that matter, the caterpillar fungus market. I think that there's going to be a capital gains tax in China, sooner than anyone thinks, because the government is fighting a futile battle against an influx of money from both inside and outside the country.

Expanding China's Tax Bureaucracy

On November 19 the China Daily reported on a Chinese Academy of Social Sciences study directing the country toward expanding the provincial and local tax system offices, with the SAT to lead in developing new tax sources in order to provide more local revenue rather than relying on revenues generated through real estate sales. Now there is one thing that a one party government can promise and deliver that a multi-party system cannot: tax increases! As part of the study, Liu Zuo, director of the Taxation Science Research Institute, said that the proportion of direct taxes will rise over the next five years, while indirect tax collections will stay the same over the next decade. As of 2009, the central government collected 52 percent of taxes, and the provinces and local tax bureaus collected 48 percent. Yet local expenditures amounted to 80 percent, meaning the central government disbursed extra funding needed by the local jurisdictions through the provinces and municipalities.

The central government is telling the local jurisdictions to increase revenues in accordance with their local responsibilities - to "experiment," as it were, with new taxes. This new program would be monitored and guaranteed by the central government.

I seem to remember China consolidating the revenue-making functions into a centralized system in order to curb the abuse and corruption that existed the further removed the local jurisdiction was from Beijing. My question is how will this be monitored? Is the bureaucracy expanding to monitor a new degree of "tax autonomy" throughout China? It appears to me that it is.

The Singapore Business Times reported on November 25 that China will be carrying out a nationwide property inspection, primarily focusing on land supply, construction of affordable housing, cleanup of idle land parcels, and the property tax, as it develops, in Beijing, Shanghai, and Chongqing. This obviously cannot be done without staff to perform the tasks. It is really going to be interesting to watch as the tax bureaucracy expands in China.

Macao's Gambling Tax Revenues

Not that long ago, my wife and I seriously considered relocating to Macao. This was right after gambling licenses were awarded to Sheldon Adelson and Steve Wynn but before they built anything. I visited Las Vegas for the first time in 1959, so I knew what was about to happen in Macao over the ensuing decade. My life would have become so different had I moved. Macao, way back when, was still very affordable. That's the investment story of my life - such deals, such affordability... and so nice to be in an environment free from capital gains tax! It would have made me a wealthy person, but such is life.

I love Macao but remain, as always, singularly unimpressed with its government. I get the feeling that Beijing has lost patience with Macanese bureaucratic incapabilities but would not want Macao to implode because it doesn't want to take over running the place. There is a rich-poor gap that is ever widening. The locals are impoverished and resentful - very resentful. Affordable, decent public housing is an unfulfilled promise, and job security with livable wages is not on the horizon, either.

The government is trying to buy off the locals with payouts from gambling revenues. The only really efficient operation in Macao's bureaucracy is auditing and collecting the gambling tax revenue.

On November 16 Chief Executive Fernando Chui, in his annual policy address, gave MOP 500 million (about $62 million) back to the people. All salary and wage tax payers will get an additional MOP 6,000 contributed to their mandatory provident fund (MPF) account. This is in addition to the MOP 10,000 MPF funding that was given out after the previous policy address.

But there's more... cash handouts! MOP 1,500 for every student, MOP 5,000 for every senior citizen, MOP 4,000 for every other permanent resident, MOP 2,400 for nonpermanent residents, and a MOP 500 voucher for everyone for medical expenses in Macao. Even after the handouts, Macao's treasury is still overstuffed with revenue, and the government doesn't have the slightest clue how to spend it best.

Call 888.916.7070 or email info@trustmakers.com

By Laurence E. Lipsher

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