Small Chinese firms seek ‘lessons in survival’ as they brace for impact of social welfare taxes

In an inconspicuous hotel in Guangzhou, nearly a hundred entrepreneurs and human resource executives crowd into a meeting room, keen to learn tax tricks that may decide whether or not their businesses will survive – how to keep their labour costs in check.

They look anxious when the lecturer, Bob Zhong, a labour law and employment consultant for small firms in the export-heavy Pearl River Delta, warns the room about an upcoming administrative typhoon.

Labour costs for private businesses will rise dramatically next year due to stricter collection of social security payments, an expected 10 per cent rise in the minimum wage, as well as a growing number of labour disputes filed by increasingly demanding workers.

“I think all of you here can agree, at least one-third of small and medium-sized private entrepreneurs [in Guangdong province] will have to shut down” if they have to pay their social welfare contributions in full, Zhong warned the attendees. Many nodded approvingly to a reporter for the South China Morning Post who attended the class.

‘Too little to dent US-China trade war costs’: Guangdong’s tax cuts leave export manufacturers cold

While demand for tips on how to control labour costs has been strong in Guangdong for the past decade as a worsening labour shortage became a day-to-day headache for Chinese manufacturers, the urgency to put a lid on rising labour costs this year is unprecedented.

A human resources manager from a factory in Foshan, a major manufacturing town near Guangzhou, who declined to be named, said the cost of labour is now the foremost concern for her factory and she feels under great pressure after Beijing made it clear that, from next January, the government tax bureau, not the social security administration, will take over collection of corporate social welfare contributions.

“Our profit margin will be totally wiped out if we pay the social security payments that the government requires,” she said. That is why her factory sent her to attend the three-hour training course, which costs 2,000 yuan (US$290), to get some tips to allow the factory to stay in business.

In his PowerPoint slides, lecturer Zhong listed a few options. A factory can hire workers “on temporary contracts”, or it can hire as many student interns as possible, or it can “hire back” retired people. Each of these categories of workers is exempt from the mandatory social welfare payment, according to Zhong,

If factory owners are worried that the tax authorities will try to collect unpaid social contributions from previous years, they can set up a “shell corporate unit” and reassign labour contracts to the shell company so that the real employer is not responsible, Zhong said. Staff would sign new contracts with the shell company, and the owner could then apply to have the old company registration cancelled, to avoid any demand for back payment of social security contributions.

Perfect storm of trade war, higher costs threatens survival of China’s small export businesses

Such was their interest, fuelled by desperation, every one of the attendees sat through the entire three-hour course. None left early – instead, many trainees surrounded Zhong after the lecture ended, asking dozens of follow-up questions in the manner of a group of zealous students chasing a beloved professor.

An owner of a tech firm in Guangzhou, who asked to remain anonymous because underpaying required social welfare contributions is technically illegal, said he was not sure whether Zhong’s tips would work but he would give them a try.

“I would try anything to save costs now,” he said. “I did my homework and found that it might cost me an extra 4 million yuan [US$580,000] if I pay my social welfare payments in full.”

UNDER PRESSURE

According to Chinese regulations, each Chinese employer is required to contribute 19 per cent of an employee’s salary into the state pension system and another 10 per cent for health insurance. In past years, the collection of these contributions has often been lax on the ground, especially among private businesses, as local authorities cut deals to keep the factories working and workers employed.

However, as economic growth slows and the population ages rapidly, Beijing is under pressure to collect more contributions from the existing workforce to pay the retirement benefits of the country’s growing army of pensioners. To accomplish this, the Chinese government decided to have tax authorities, which it controls directly, take over fee collection so that it would be harder for employers to evade required payments.

Zhao Xijun, an economist from the School of Finance at Renmin University of China, said Beijing had a dilemma, needing more money to pay pensions and social welfare benefits on one hand but trying to “lower business costs” to boost small business performance on the other.

“The central government has noticed the worries and complaints from enterprises across the country” about the enhanced social tax collection, Zhao said.

Chinese firms start to cut jobs and move overseas as US trade war and rising costs start to bite

According to research released last month by Guotai Jun’an Securities chief economist Hua Changchun and his research team, Chinese businesses may have to pay an extra 2 trillion yuan (US$290 billion) in social security payments next year as a result of the new collection process.

The additional cost comes at a time when Chinese small businesses, particularly export-related ones, are already under severe pressure from the impact of China’s trade war with the US.

Premier Li Keqiang said this month that the central government would try to avoid increasing the tax burden on businesses. And four Chinese ministries, led by the social security ministry and the taxation administration, issued an urgent notice two weeks ago prohibiting local governments from collecting unpaid social welfare contributions from previous years.

Renmin University’s Zhao said the priority now for China was to reduce the cost burden on business, not just maintain it at the current high levels.

“If not, more and more companies will leave and relocate to other countries,” where labour and other business costs are lower and there is no trade war impact, Zhao warned.