CHINA: China steps up tax crackdown on overseas investments

Chinese authorities have stepped up calls on investors to pay taxes on their global gains, forcing wealthy individuals to rethink their trading strategy as Beijing tries to fill its coffers to counter economic pressures.

Tax authorities in major economic hubs such as Shanghai, Zhejiang and Shandong this year issued calls on their websites for investors to declare their taxes, while also calling and messaging individuals personally. Officials this month escalated the campaign with a big state media push.

“There is no exemption for direct stock trading income from overseas,” said the central bank-backed Financial News. “Paying taxes according to the law is a duty for every citizen. In serious violations, they may be investigated by the tax department and face penalties.”

While gains from onshore accounts are exempt until 2027, the government wants to crack down on gains made from offshore accounts, which have been increasingly attractive to Chinese investors as domestic capital markets underperform.

Investors who spend 183 days a year in mainland China face a 20 per cent tax on their global income. Countries across the globe levy similar taxes, ranging from 10 to 30 per cent. In practice, authorities in Beijing have long lacked the systems, staff and budget to pursue potential evaders.

But the collapse of land sales and slowing economic growth have made it more urgent for China to find new sources of fiscal revenue. This pressure is particularly acute this year, with Beijing keen to tackle local government debt, roll out its first nationwide baby subsidies and fund programmes to boost household consumption.

In 2018, China launched a mobile app for individual income tax reporting, after adopting the Common Reporting Standard, an OECD-backed framework to combat global tax evasion.

Since then, China has been able to exchange financial account information, including balances and contact details, from banks, brokerages and asset managers with the more than 120 members of this network, including Hong Kong.

This has made it easier for authorities to screen people on the mainland who actively trade foreign stocks via online platforms such as Futu Securities or Tiger Brokers, said Eugene Weng, a lawyer at Shanghai-based Wintell & Co.

“The cost of identifying and tracking offshore gains has reduced significantly for mainland authorities,” Weng said.

Futu, Tiger and Interactive Brokers have received calls from clients in recent weeks, anxious that their details have been given to authorities in the mainland. All companies said they fully comply with tax reporting obligations in jurisdictions in which they operate.

In June, the Shanghai tax bureau asked Shanghai-based investor Roger Huang for 20 per cent of the profits he had earned from trading Hong Kong stocks over the past three years, including dividends and interest.

Huang was told he could offset gains and losses within a single tax year, but not across years. Already, he is facing daily penalty fees for late payment on the previous two years through 2023. “Such a penalty is unfair as no notice was given earlier,” he said.

Shift to US platforms

The crackdown is also prompting investors to rethink their asset allocation and tax strategies, moving their assets to platforms that are not part of the CRS.

Huang is considering moving his assets from Futu’s Hong Kong account to the firm’s US-based platform. “I haven’t made up my mind yet as I do need to compare with other options to make more sense of my taxes,” he said.

Many investors are considering closing their accounts with Chinese brokerages and shifting to American platforms. “I’m sure that in my lifetime the US and China will not work together, they will not share information,” said one investor considering the move. “I’m betting on that.”

Wintell’s Weng warned that as long as the stark imbalance between a lacklustre domestic stock market and a booming US and Hong Kong market persists, “capital flight will continue to be a challenge”.

“Ultimately, this is a confidence issue,” Weng said. “When a jurisdiction enforces taxes, it can signal that the state is lacking stable and rich tax sources. This perception, in turn, can undermine investor confidence.”