Chinese cities desperate for cash are chasing companies for taxes — some from the 1990s

Analysis by Laura He and CNN Staff, CNN

Hong Kong (CNN) — Authorities in cash-strapped Chinese cities are chasing companies for taxes dating back years, and in some cases decades, as they try to plug a hole blown in their finances by the real estate crisis.

At least eight major listed companies in China have disclosed that they’ve received demands to pay historical taxes, in one case going as far back as the 1990s, in a development that has caused an uproar online and damaged already fragile business confidence.

V V Food & Beverage, the country’s largest soy milk producer, said last week that one of its subsidiaries had received a demand for payment totaling 85 million yuan ($11.7 million) from the government of Zhijiang city in the central province of Hubei.

The Zhijiang tax bureau said it recently found that the company had failed to file tax returns for 16 years from 1994 to 2009, the company said in a June 12 statement.

The beverage maker isn’t the only one to fall foul of the apparent tax crackdown. At least seven other listed companies have reported similar demands over the past few months. In some cases, the companies have had to suspend production and lay off workers because they couldn’t absorb the hefty tax bills and penalties.

The crackdown suggests local governments are searching for another way to fill their coffers, as they struggle under mounting financial stress because of a persistent property slump and economic weakness. The authorities have also publicized efforts to work more closely with police to find tax offenders, which has caused even more alarm.

“Local governments in China are facing intense pressure to meet revenue targets, especially amidst economic slowdowns and broader fiscal challenges,” said Craig Singleton, senior China fellow at the non-partisan Foundation for Defense of Democracies.

Regional governments have long relied on land sales as a major source of revenue, which are used to pay for everything from roads to healthcare. But a real estate crisis since 2021 has diminished that source of funding.

Over the past year, local governments have turned to extraordinary measures to raise cash or cut spending, including fining restaurants for serving shredded cucumber on noodles without a license or cutting fuel subsidies in the middle of winter.

An ‘extreme’ response

After the tax crackdown went viral on social media, the State Administration of Taxation issued a statement Tuesday, trying to calm nerves.

It acknowledged that some tax authorities had been inspecting companies for potential misconduct but denied that it had launched “any nationwide, industry-specific or centralized tax inspections.”

“We fully understand the concerns of the business community and the public, “ it added.

The admission has whipped up speculation online this week that the establishment of “Police & Taxation Joint Combat Centers” in some parts of the country will result in much more aggressive taxation policies to come. The centers, which enable local police and taxation authorities to share intelligence and manpower, were first trialed in the city of Yichun in the southeastern province of Jiangxi in 2021.

And the central government’s attempt to reassure has jarred with the local crackdowns, causing confusion and fear.

Investigating possible back taxes from 20 or 30 years ago seems “extreme,” said Frank Tian Xie, a professor at the University of South Carolina Aiken.

“If those companies indeed owed taxes before, why didn’t the authority go after them right away? … Why isn’t it the government’s negligence in tax collection that resulted in this fiasco?” he said.

The resulting payments, including the unpaid tax, fines and interest could be “exorbitant” and lead to bankruptcies of many companies, he warned.

The crackdown poses “severe risks to businesses already strained by operational challenges and external economic pressures,” Singleton said. “This could ripple through the economy, potentially exacerbating job losses and dampening investor confidence.”

Beijing has been trying to reassure the private sector over the past year. Such businesses have become increasingly reluctant to borrow or invest, after years of regulatory crackdowns and stringent Covid restrictions battered their confidence.

Profits hit

So far, the targets of the probes have been privately owned businesses in a variety of industries.

V V has warned that its bottomline could take a hit. Last year, the soy milk seller made a net profit of only 209 million yuan ($29 million). And it’s still unsure how much it owes in fines, which could be potentially higher than the actual $11.7 million tax bill.

Last Wednesday, Ningbo Bohui Chemical Technology, a producer of additives and light fuel oil, said it had to suspend production because of “operating cash difficulties.” The cash crunch was revealed shortly after the Ningbo government asked the company to pay taxes for one of its products sold between July 2023 and March 2024. The company said that would “affect” its net profits by about 500 million yuan ($69 million).

The tax bureau later said the levy was imposed after a national rule was updated last year. The company said it shouldn’t have been subjected to the tax.

“It [the new taxes] will have a significant adverse impact on the company’s 2023 performance and future production and operations,” Bohui said in a statement in March. “The company will swing from profits to big losses in 2023.”

Zangge Mining, a producer of potassium chloride in the western province of Qinghai, said in April that it had received a demand from the Golmud city government to pay back taxes from 2019 to 2023. Including fines, the company needed to pay a total amount of 480 million yuan ($66 million).

Chongqing-based PKU Healthcare, Shanghai-based Shunho New Materials, Shenzhen-based ChinaLin Securities, and Yunan-based Yixintang Pharmaceutical Group have also paid tax bills to local governments going as far back as seven years, according to separate statements made in March and April. The amounts paid vary from 8 million yuan ($1.1 million) to 310 million yuan ($43 million).

The first company to report on the trend this year was LianTronics, a major LED display manufacturer. It said in January that the Shenzhen government had asked for payment of 19.8 million yuan ($2.7 million) in back taxes for 2017 and 20.2 million yuan ($2.8 million) in fines.

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CNN’s Steven Jiang, Hassan Tayir and Fred He contributed reporting.