After shopping, travel and health, China’s digital revolution has the tax system next in its sights
Some tax returns can already be done on a mobile phone in a matter of minutes, while digital technology also helps authorities check that everyone is paying what they should
Imagine being able to file a tax return in minutes on a mobile phone. For Americans in particular, wrestling with the complexities of filings that often require specialist help, the idea would seem appealing.
It is appealing in China, and a reality too for some. Hua Jun, a bank worker in Shanghai, completed his 2017 tax filing in early February this year, in a few minutes and almost two months ahead of the March 31 deadline, thanks to a free filing service on internet giant Tencent Holdings’ popular messaging app WeChat.
As a second-time user, with his basic information already stored, all he had to do was verify it and add any new details and submit it to the WeChat account of the Shanghai government.
“It’s much more convenient than the traditional postal filing,” Hua said. “It’s so easy that I completed it much earlier than in previous years.”
The surging use of disruptive technologies in China has revolutionised everything from shopping to travel to health care, and now digital technology is not only simplifying the tax system for individuals but is helping businesses to control risks and the government to push forward its plan to modernise the tax system and make sure tax is paid.
“The Chinese State Administration of Taxation has been working hard to achieve its goal of establishing a modern tax administration system by 2020,” said Matthew Mui, a partner in accounting and consultancy firm PwC’s China national tax policy services department, in “Paying Taxes 2018”, a joint report with the World Bank.
“Tens of thousands of tax services department officials at all levels of tax bureaus have streamlined the organisation of those bureaus, standardised various tax payment procedures and systems, upgraded tax service hotlines, and embraced young taxpayers’ favourite online and mobile apps to provide innovative tax services and promote timely awareness of tax rules,” he said.
Reform of the tax system has been high on China’s agenda, in part to help its economy through a slow patch, although the country has not gone as far as US President Donald Trump’s tax cuts bill. Beijing’s focus is likely to be on cuts for business rather than individuals as well reform of tax collection processes. There have been no major reforms of individual income tax, for example the tax threshold has remained unchanged at 3,500 yuan on monthly wages since 2011.
China rolled out the “Golden Tax III” system in 2016 to standardise tax compliance procedures across regions, eliminate duplicate filing and further improve the efficiency of tax authorities around the country.
In 2017, China’s tax revenue grew by 10.7 per cent on year to 14.4 trillion yuan (US$2.3 trillion), according to data from the finance ministry, resuming double-digit growth for the first time in five years. Individual income tax revenue grew by 18.6 per cent to 1.2 trillion yuan. China collects individual income tax progressively through seven tax brackets with rates ranging from 3 per cent to 45 per cent.
China has required individuals whose yearly incomes surpass 120,000 yuan to file annual tax returns since 2006. Returns were paper-based. Taxpayers had to first obtain the corporate tax identification number of their employer, the total amount of their yearly wages and the amount of tax withheld, then fill in a designated form with all the details plus personal information and post it to the local tax authority.
That makes the Chinese system almost as cumbersome as the US one, although a direct comparison is not accurate due to the wide difference in the kinds of financial and investment opportunities for citizens and their tax treatments between the two countries.
But in China the use of technology has been on the rise since tax payments through quick response (QR) codes, a type of bar code, through WeChat Pay and Alipay began in 2015 and 2016 in the cities of Shenzhen and Hangzhou respectively.
In Shanghai, WeChat is one of three online channels available for individual tax filing, with the others being Alipay, the mobile payment platform of Ant Financial, and the official website of the city’s tax authorities.
Last month, tax payments by QR code via UnionPay, mainland China’s dominant bank card clearing services operator, began in Dalian in the northeastern Liaoning province. Digital tax payments are also available in Shandong and Henan provinces and in the municipality of Chongqing.
While the growing use of technology is helping individuals, it is also a bonus for the tax authorities, giving them more power to track and spot irregularities. The data authorities collect allows them to spot unpaid or insufficient tax by companies and individuals and also makes it easier for authorities to track and verify relevant information and stem irregularities.
In one initiative, tax authorities have teamed up with software companies to develop a system that uses web crawlers to spot corporate information disclosure online, such as changes in shareholdings, to check for unpaid tax, according to EY.
In Shanghai and Beijing, 97 per cent of taxpayers already file and pay taxes online, providing vast amounts of data to the State Administration of Taxation, according to the World Bank and PwC report.
Media reports of the discovery of irregularities through big data analysis act effectively to warn off those who attempt similar malpractices, said a veteran financier at a state-owned institution in Shanghai, who declined to be named.
The growing use of technology is also helping business lower their tax compliance burden. The time spent on tax compliance in China shrank by 75 per cent from 832 hours in 2004 to 207 hours in 2016, according to the World Bank and PwC report. That was lower than the global average of 240 hours, but still above the 182 hours average in North America.
Businesses in China have been increasing investment in revamping their corporate tax compliance systems, spurred on by digitalisation, according to Patricia Xia, Greater China digital tax leader at accounting and consultancy firm EY.
“It has been a sea change when compared with a decade ago, when lots of businesses couldn’t see the value in technology-driven tax risk management,” she said, noting that such investments could help cut high rising labour costs and increase efficiency in controlling tax risks and coping with tax inspections.
“Overall, we see tax authorities in China empowering themselves with evolving technology to facilitate tax compliance for taxpayers and better police the system in building up a modernised tax regime,” she added.
Alipay is affiliated with Alibaba, which owns the South China Morning Post.