China tracks overseas assets to crack down on wealthy tax evaders in a U.S.-style tax overhaul

[Financial News]  

China has stepped up efforts to crack down on tax evasion by the wealthy. It is also combing through assets hidden overseas. Analysts say the country is moving toward a U.S.-style tax system that taxes foreign assets.
The Financial Times (FT) reported on the 5th, citing sources, that Chinese authorities have begun tracking the global assets of the wealthy in an effort to collect hundreds of billions of dollars in back taxes. The move is aimed at filling a tax gap as the fiscal deficit widens.

Authorities are thoroughly examining hidden overseas capital gains and investments held by the wealthy, and in some cases are looking back as far as 2000. They are paying particular attention to capital outflows.
According to sources, banks and other Chinese financial institutions have been instructed by authorities to review the overseas investments of wealthy clients. They have been told to check whether the income was reported to Chinese tax authorities.
A full investigation is under way into assets that the wealthy moved overseas through real estate, stocks, precious metals and cryptocurrencies.
FT said multiple government officials, banks and investment advisers have confirmed the current tax evasion probe.
In recent months, banks have been freezing the accounts of wealthy clients in coordination with authorities. A banker in southern China said accounts remain frozen until authorities determine that taxes on overseas assets, accounts and trusts have been fully paid. He added that the freeze is lifted only after immediate payment of fines and taxes in cash.

Victor Cha, a professor of Chinese political economy at the University of California, San Diego, said the authorities' response was "clearly about filling the fiscal gap."
China's fiscal revenue, which relies heavily on taxes, peaked during the COVID-19 pandemic in 2020 and has been declining since then. Last year, it fell 1.7% from a year earlier to 21.6 trillion yuan, or about 4,552 trillion won. Land sale revenue, once a major source of income, peaked at 8.7 trillion yuan in 2021, but has since shrunk to 4.15 trillion yuan as the property market has collapsed.

Meanwhile, the Ministry of Finance of China and the NTS said in a joint statement last month that they plan to launch a sweeping tax crackdown on funds flowing into offshore trusts, declaring that they will close loopholes long used by the wealthy to evade taxes.
A banker in Singapore who manages offshore assets for wealthy Chinese clients said his customers were shocked by the news of the new tax measures.
Experts expect most trust holders to pay taxes, except for some offshore assets with highly complex structures, and some may need to sell assets to cover the bill.
According to Chinese media, authorities began imposing a 20% tax on dividends and interest income from offshore insurance products starting on the 5th.
Taxing overseas assets is a U.S.-style approach. The United States taxes taxpayers on their worldwide income.
Ye Yongqing, a tax lawyer at Shanghai Anli Partners, said, "Regulators are... curbing the transfer of assets overseas by wealthy Chinese and tax avoidance through offshore channels," adding that they are "taking an approach similar to U.S. tax law."


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