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Last-Minute Tax Tips

China’s national sport: tax evasion?

Scott Tong Apr 9, 2010
Last-Minute Tax Tips

China’s national sport: tax evasion?

Scott Tong Apr 9, 2010


Tess Vigeland: We’ve spent much of the program talking about taxes here in the U.S. There’s plenty to complain about, but if you thought it was tough keeping track of your receipts, at least you don’t have to suffer through the game they play in China.

Our China bureau chief Scott Tong sent this non-appreciation from his office in Shanghai.

Scott Tong: Every day here, the sun rises, the earth turns… And a fax arrives from the tax evasion industry.

[Sound of fax machine beeping and whirring]

It’s unsolicited spam, offering government-approved receipts, a key ingredient to cook your books. This fax reads: “Dear sir. Our company has legitimate receipts for sale. Please call.”

[Tong on the phone talking to salesman]

So I do — and asked how much do these receipts cost?

Seller says 1 percent. That is, if I want a receipt showing I’ve spent $100 on something, it costs me one dollar.

Salesman: If you want a receipt for meals, we can make it out to be from a restaurant. Or, if you want, a construction company, or advertising company.

Here’s the tax cheating part: I take the receipts, file bogus expense reports at work and get massive reimbursement. My boss, who’s in on the scam, knows I’ve been — ahem — “reimbursed,” and only pays me a teeny tiny salary. Which means I only pay teeny income taxes.

[Sound of clinking silverware]

When I take in a meal with local Chinese workers, hang out with them, I realize everyone does this kind of thing. One friend notes that China’s national sport isn’t soccer — it’s tax evasion.

Office worker Wang Haiyan says most of her income is off the books.

Wang Haiyan: In my contract, I make about $400 a month. But I use receipts to get another $700, sometimes a $1,000.

There are variations to this game, perhaps only limited by one’s imagination. But the key in China is employers are in on it. They’re liable if workers cheat the tax man.

CPA Hank Bourg works for a Shanghai consultancy, Dezan Shira.

Hank Bourg: So your typical Chinese business keeps multiple sets of books. So you have the official one that they show to the government, they have the ones that they’re willing to show any partners and then they have the third one, that’s the real one because they have to manage their business.

He says what makes all this possible is the tax enforcers are…

Bourg: A little bit behind in their sophistication, but rapidly closing the ranks. And what that means is that there probably is a lot of people here that are exploiting that lack of sophistication.

Now, why do folks cheat on their taxes? Perhaps an obvious question, but many here say it’s because rates are so high, especially for the wealthy.

Bourg: The U.S., currently, I believe tops out around 28 percent. In China, it tops out at 45 percent.

The lowest bracket is 5 percent, for persons making just above $300 a month, or $3,600 a year. And unlike the U.S., you can’t write off things like mortgage interest, or doctor costs or college prepayments. China’s tax code doesn’t reward those behaviors the way America’s does. Nor does it wait for citizens to do the right thing every April 15.

[Phone ringing]

Cecilia Chen: Wai, ni hao.

Every so often, my office colleague Cecilia Chen gets a call from the local tax bureau. Individuals here have to pay their taxes every month, and if they’re overdue, or almost overdue, they get a call at the office.

Our Shanghai friend Wang Haiyan works hard to keep her local tax collectors happy.

Wang: We give them shopping gift cards four times a year, for $25 or $75. Otherwise, they’ll watch me like hawk. And if we start to get in any kind of trouble, we give them money.

Or sometimes, the tax collectors drop a hint. Again, accountant Hank Bourg.

Bourg: Not all of them are honest. You know, there is a lot of corruption in the Chinese system. They, you know, sometimes will request special payments.

To put this corruption in perspective, Bourg notes that this kind of thing happens all around the world, and China is not even considered one of the dirtier places. By one estimate, it’s 79th cleanest out of 180 countries measured. And in their defense, Chinese taxpayers often say they keep money from government coffers because they’re even sure the money would even go to government coffers.

Here’s a few comments from China’s blogosphere:

Blogger 1: Where’s my tax money go? I demand to know if it goes to politicians and their so-called “overseas study tours.”

Blogger 2: You know what civil servants are for? To eat, drink and schmooze, with our money.

Perhaps that’s the big difference between here, and the U.S. The American taxpayer is skeptical of government waste; the Chinese taxpayer is skeptical of government fraud.

In Shanghai, I’m Scott Tong, for Marketplace Money.

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