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The Taxman Cometh for Fan Bingbing. So How Widespread Is Tax Evasion in China?

A ChinaFile Conversation

On October 3, mega-famous Chinese actress Fan Bingbing emerged from months of silence to admit on Weibo that she had evaded taxes and owed over U.S.$100 million worth of civil fines to Chinese authorities. In a remarkable apology, Fan wrote that, “without good national policies, without the love of the people, there is no Fan Bingbing.” Fan’s declaration follows revelations that she and other stars used “yin-yang” contracts, which involve submitting false incomes for movie deals to the tax bureau.

Tax collection in China has long been problematic, with one essay in a late 2000 issue of Foreign Affairs observing that “the chronic inability to collect taxes has all but crippled the government” there. Many underpay; then again, enforcement against tax cheats has often been selective, sometimes exercised to silence critics of the government, like Ai Weiwei.

How widespread is tax evasion? What does that say about trust in the Chinese state? For their part, how honest are tax authorities being in choosing whom to prosecute? Was Fan singled out, and if so, why? —The Editors

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For all the media attention it has received, little is known yet about the details of Fan Bingbing’s tax evasion case. According to a skeletal government announcement, Fan and her companies evaded 134 million renminbi of taxes, and underpaid another 114 million. For this, they were subject to roughly 570 million renminbi in penalties—a hefty sum, to be sure, but still well below the maximum statutory penalty of 500 percent. We have at present no way of evaluating the fairness of the tax assessment against Fan, but the penalties at least give the impression of moderation on the part of decision-makers in Beijing.

This impression is consistent with the government’s choice not to bring criminal charges against Fan, with recent disgruntled Weibo postings by Fan’s whistleblower Cui Yongyuan (whose reports to the government were apparently greeted with much indifference), and with the decision of the State Administration of Taxation (SAT) to reprimand frontline tax officials in Wuxi, where Fan’s studio is located, for “lack of zeal” in tax administration. This last decision implicitly deflects the blame away from Fan, perhaps just as effectively as Fan’s public avowal of “deep reflection.”

Was Fan singled out for harsh treatment? It depends on whom you compare her with. Liu Xiaoqing and Mao Amin, superstar entertainers from an earlier era, were jailed for what now seem far smaller tax offenses. On the other hand, Zong Qinghou, the Chairman and CEO of Wahaha, was revealed in 2008 to reportedly have skipped paying 300 million RMB of individual income tax. Zong made the tax payment, and the SAT, apparently in awe of Zong’s status as an entrepreneur and as a delegate to the national legislature, let him go without one cent worth of penalty. Remarkably, over the next decade, Zong went on to become one of the most strident maligners of China’s personal income tax system. If Fan can refrain from such chutzpah, the 2018 incident will likely soon be forgotten.

Before everyone returns to business as usual, it is useful to peek at the precarious foundations of the Chinese fiscal state, which the Fan Bingbing incident shines light on. In China, tax cheating by movie stars is of interest not because it undermines the tax morale of ordinary taxpayers; ordinary folks cheat as well. A more pernicious threat to the tax system comes from the fact that politicians want simultaneously to raise tax revenue and to retain the capacity to deliver favors to political allies in non-transparent ways. Reducing tax payments then becomes part of the bargain over rent-seeking between political authorities and economic elites. The latter of course feel that they are entitled to a better bargain, and therefore push back whenever they can, whether through tax evasion or by fueling anti-tax public opinion. In the meantime, tax collectors must toil under the awareness that although their job is backed by the force of the state, it is not by the force of law, and they must constantly guess at the directions in which the political wind blows.

The Fan Bingbing saga isn’t just about tax. It’s also about how the Chinese state operates. Her treatment shows that when the Chinese government wishes to do something, law is at best a guideline but not a constraint.

Fan disappeared in early June. She reappeared in public about four months later, in early October. Where was she all this time? According to the South China Morning Post, “sources” said she had been placed in “residential surveillance at a designated location” (RSDL)—a form of pre-trial detention under China’s Criminal Procedure Law—from the time she disappeared until about three weeks before her emergence. The claim is plausible, because otherwise it is difficult to account for her disappearance.

But the application of this measure to Fan violates the rules governing it.

RSDL is governed by Article 73 of the Criminal Procedure Law. It may be applied in the following circumstances: (1) when the suspect has no fixed residence, or (2) in cases involving threats to national security, terrorism, or bribery of a particularly large amount, where ordinary residential surveillance would impede the investigation, and where approval has been obtained from the superior procuratorate or public security organ.

The second condition does not appear to be met here: this was a tax case. As for the first condition, the authorities (in the form of the Ministry of Public Security and the Supreme People’s Procuratorate) define “fixed residence” as a fixed residence in the place where the investigation is taking place. This means that if you live in Beijing, but the investigation is happening outside of Beijing, the authorities can put you in RSDL outside of Beijing. But assuming Fan’s residence is in Beijing, then both the local and national tax authorities would also be in Beijing, as well as any police investigating her tax problems. Thus, the application of RSDL seems unjustified under either of the conditions in Article 73.

An even clearer argument as to the illegality of Fan’s detention lies in the notice requirements of RSDL. When a person is subjected to RSDL, his or her family must be notified within 24 hours unless it is impossible to do so. Presumably it is not hard to find Fan’s family. Yet it seems that they were never notified. If not, that is an open-and-shut violation of the rules on RSDL.

Many legal systems, not just China’s, show cracks when faced with extreme or novel circumstances. But that is not happening here. According to the Chinese government’s own story, this is an ordinary case of tax evasion by a rich person. And yet even in this ordinary case, the state could not manage to follow its own rules.

Tax collection in China is high overall. The International Monetary Fund (IMF) reports that general government revenue from taxes and fees is 29 percent of GDP this year—and that excludes revenue from land sales, which is an additional source. So, the government has plenty of resources to carry out its normal functions. In its revenue collection, the government relies heavily on a value-added tax, which economists favor as a relatively efficient and simple form of tax collection. However, the VAT in general is not progressive, and can be regressive depending on exactly how it is structured. Most countries relying on the VAT complement it with steeply progressive income and wealth taxes. China has essentially no wealth tax, not even the commonly used property tax. Its income tax is steeply progressive, but little revenue seems to be collected, suggesting serious problems with enforcement on the government side and social trust on the popular side.

The distribution of income in China has become much more skewed during the decades of reform. Some of that was inevitable as people began to get returns on their education and entrepreneurship—returns that were essentially non-existent in the planned economy. But the rise in inequality has gone well beyond what improvements in efficiency could explain. Factors such as limitations on rural-urban migration, under-investment in education and health, and under-funding of safety nets have led to unnecessary increases in inequality. Most countries use taxes and transfers to mitigate inequality, but China has almost no redistribution through the fiscal system. Fiscal reform could play an important role in addressing inequality in China if it secured higher contributions from the rich through income and wealth taxes and ensured proper funding for social services that benefit the poorer half of the income distribution.