LI Jinyan and HUANG He

China’s tax system is probably the most ancient and, at the same time, the most recent in the world. While records of land taxes go back almost four thousand years, the current tax structure did not come into existence until after 1980. Despite the Western influences of China’s current tax system, it remains compatible with China’s culture and politics.

The Chinese tax system looks like other tax systems in many ways. It consists of income taxes, consumption taxes (similar to sales taxes), property taxes, and other miscellaneous taxes. The functions of taxation are to raise revenue, to stimulate economic growth, and to facilitate social and political stability. China’s current system is the result of major reforms since the 1980s.

Tax Reforms

Soon after the People’s Republic of China came to power in 1949, the Communist Party reconstructed the economy. Private capital was nationalized, and foreign investment gradually left China. A type of sales tax and a property tax were introduced and administered by the general tax bureau. The reconstruction was more or less complete by 1956. From 1956 to 1978, a strict Soviet-type economy was practiced, and the private sector almost vanished. Industry and commerce were controlled by publicly owned enterprises. State-owned enterprises delivered all their profits to the government, and sales taxes were generally used to facilitate the transfer of funds from enterprises to the government’s coffer. At the peak of the political and economic turmoil during the Cultural Revolution (1966–1976), law and order were in disarray, the role of taxation was disregarded, and the tax department existed only in name.

In 1978, under the leadership of Deng Xiaoping, the Communist Party changed its policy from political struggle to economic development. Deng made it clear that the need for economic development prevailed over the pursuit of the party’s socialist ideals. Economic reforms changed the relationship between the state and the market, allowing for the creation of a tax policy.

The new economic policy had two objectives: opening up China to the outside world and reforming the domestic economic system. Establishing a modern tax system was considered critical to the success of the economic policy. To facilitate the transition, a two-track tax system was introduced so that a Western-style tax system would apply to foreign firms and individuals and another system would apply to Chinese firms and citizens.

The foreign track was created first and consisted of the individual income tax, targeted at foreign individuals (1980); the equity joint ventures income tax (1980); and the foreign enterprise income tax, applicable to foreign-owned enterprises and other foreign entities doing business in China (1981). An earlier tax—the consolidated industrial and commercial tax—remained applicable to foreign investors because it was the only tax in effect before 1980.

The domestic track was created in 1983 and 1984. State enterprises became subject to taxes, a reform commonly referred to as li gai shui (taxation replacing profit delivery). Separate taxes applied to the emerging collective enterprises and private enterprises; sales taxes applicable to domestic enterprise were introduced; and numerous miscellaneous taxes on property and transactions were reintroduced.

More substantive reforms began in 1986. In 1991 the foreign track was consolidated to create the enterprise income tax on foreign investment enterprises and foreign enterprises (FIE tax). In 1994 the three domestic enterprise income taxes were replaced by a one consolidated domestic enterprise income tax. The foreign track merged with the domestic track in the areas of sales tax and individual income tax. The 1994 reform also resulted in a new tax assignment between the central government and local governments as well as a new system of tax administration. Overall, the foreign track is a more Western-style tax. Because China wanted to follow the international tax norm, the FIE tax addresses international issues. The domestic track has more features from the old Soviet-style economy and is much less detailed than the FIE tax is. With respect to deductible expenses, FIEs may deduct the cost of wages, salaries, and employee benefits, whereas domestic enterprises can deduct only the amount of wages in accordance with the standard set by the government.

As of 1 January 2008, China implemented a fundamental enterprise income tax reform that adopts a lower general tax rate and unifies the tax rules applied to all enterprises. This new Enterprise Income Tax (EIT) replaced FIE tax and domestic enterprise income tax. It is a hybrid of international tax norms and China’s indigenous rules. For example, the new tax legislation provides anti-avoidance rules such as transfer pricing rules and thin capitalization rules, which seem to be the most direct adoption from international tax rules and are designed to prevent multinational corporations from shifting profits away from China without paying Chinese taxes. On the other hand, the legacies of economic transition and Chinese culture find their ways into this legislation. For instance, there are still a number of “residual” clauses authorizing the government to determine “other” amounts or issues in the new tax system.

Current Tax Structure

The State Administration of Taxation (SAT) is responsible for administering tax laws in China. Its national head office is in Beijing. Local tax bureaus collect local taxes and some taxes shared between the central government and local governments. Although they are part of the local government, they fall under the SAT in terms of tax law interpretation and policy.

Four types of taxes are collected in China: consumption taxes, income taxes, property taxes, and miscellaneous taxes.

Consumption Taxes

Consumption taxes (liu zhuan shui) generate more than two-thirds of the total tax revenue. A consumption tax is a type of sales tax.

The value added tax (VAT) is the most productive source of revenue—generating about 37 percent of total tax revenue in recent years (e.g., 36.7 percent in 2006 and 37.5 percent in 2005). This tax applies to the sale of goods and certain services. The standard rate is 17 percent; a lower rate of 13 percent applies to necessities, certain culture products, agricultural supplies, and certain other goods. Small suppliers are taxed at 6 percent. Exports are not taxed. The business tax is imposed on business activities that are not subject to the VAT, mostly services. The tax rate is 3 percent for transportation, construction, postal communication, and cultural and athletic activities; 5 percent for banking, insurance, services, and the transfer of intangible property and immovable property; and 5 percent to 20 percent for entertainment (the applicable rate is determined by the local government).

The consumption tax is imposed on the sale and importation of luxury goods, such as tobacco, liquor, cosmetics, fireworks and firecrackers, gasoline, diesel, tires, motorcycles, and automobiles. The tax rates range from 1 percent on nonluxury cars to 45 percent on top-quality cigarettes. This tax is imposed in addition to the VAT.

The resource tax is imposed on the production and sale of crude oil, natural gas, coal, nonferrous metals, ferrous metals, and salt. The amount of tax payable is determined by the Ministry of Finance according to the mining or production conditions of the taxpayer.

Income Taxes

Income taxes are the second major source of revenue, generating about 22 percent of total
tax revenues. Income taxes have been growing faster than consumption taxes since the late 1990s. For example, VAT grew by 22 percent in 2000, while FEI tax grew 50 percent, individual income tax grew 59 percent (SAT

The individual income tax is a schedular tax; that is, different types of income are subject to different tax rates, and certain deductions are allowed. Income from employment is taxed monthly at progressive rates ranging from 5 percent to 45 percent. Income from the business of industrial and commercial activities and enterprise leasing and management are taxable annually at progressive rates ranging from 5 percent to 35 percent. Income from personal services is subject to a 20 percent flat rate tax. Investment income, incidental income, and capital gains are taxed at a flat rate of 20 percent. In computing the taxable amount, a deduction for actual expenses is allowed only in the case of business income. A standard deduction is allowed in the case of employment income, income from services, rents, and royalties. Interest, dividends, and incidental income are taxed on a gross basis. Taxes are withheld at the source. Enterprise Income Tax now applies to all enterprises (any business or organization that is not a sole proprietorship or partnership).

Property Taxes

A large number of taxes are imposed on property, transactions, and other real estate activities, generating about 8 percent of total tax revenues. Taxes on real estate are the most significant. A real estate gains tax was introduced in 1993 to regulate the growing real estate market in China. It applies to gains from the transfer of land-use rights, buildings (other than residential housing), and other structures on the land at progressive rates ranging from 30 percent to 60 percent. The urban real estate tax is imposed on the owners of real estate in urban areas. The deed tax is levied on the transfer of land-use rights and the sale, gift, or exchange of houses and buildings.

Miscellaneous Taxes

The stamp tax applies to the signing or issuing of commercial contracts and documents. For example, loan contracts are taxed at 0.005 percent of the loan amount, and technology contracts are taxed at 0.03 percent of the contractual price. Taxpayers pay the tax by purchasing and affixing tax stamps.

The banquet tax is levied at 15 percent to 20 percent of the cost of each banquet costing over 250 yuan (about $37). The tax is withheld by the restaurant.

Tax Revenue Sharing

A key function of taxation is raising revenue. Since the 1980s, taxation has become a main source of government revenue. Most taxes in China are collected by the use of consumption taxes. Compared to income taxes, consumption taxes are easier to administer. These taxes are collected from enterprises, not consumers, thereby reducing the cost of administration and compliance. The tax mix has been favorable for generating revenue. Sharing the revenue from taxes between the central government and local governments is an enormous challenge.

China’s financial system is highly decentralized. Expenditures by local governments account for 71 percent of government expenditures. The central government has exclusive taxing powers in terms of legislation. All taxes are introduced by the central government. However, revenue from specific taxes is assigned to local governments. Overall, local governments receive about 50 percent of total tax revenues.

Under the current revenue-sharing system, local governments are entitled to the revenue from the following taxes: 100 percent of property and transaction taxes; 25 percent of the VAT; business taxes (with minor exceptions); domestic enterprise income taxes (other than those paid by centrally owned enterprises, local banks, financial institutions, and railway, banking and insurance companies that pay income tax centrally through their head office); FIE taxes (other than those paid by foreign banks); and resource taxes (other than those paid by offshore oil companies).

Tax Expenditures as Policy Instruments

Using tax expenditures as policy instruments is consistent with China’s previous practice of central planning, the need to accommodate local economic conditions of different regions of the country, and the desire to compete with other developing countries in attracting foreign direct investment. International competitiveness has always been a key concern in Chinese tax policy.

China has used tax expenditures extensively in both the income tax system and consumption tax system. Every major tax contains tax expenditure provisions. For example, the VAT exempts contraceptive medicines from taxation. The business tax exempts child care, education, and medical services. The individual income tax exempts a large variety of items from taxation. They include awards from the government, settlement fees to military personnel, and salaries of foreign experts sent to work in China international organizations.

The new enterprise income tax law provides a general low tax rate and unified tax incentives to both domestic and foreign investment enterprises. The nominal enterprise income tax rate is 25 percent, which is internationally competitive. The new tax incentives are designed to achieve tax equity between domestic enterprises and FIEs, to reduce administration and taxpayer compliances costs, as well as to achieve an overall, long-term, sustainable development of Chinese economy. They favor high-tech, industry-oriented or environment-oriented investments, and nonprofit organizations, or small, low-profit enterprises. These eligible enterprises obtain tax preferences based on the nature of their investments, other than the form of ownership or special locations.

Tax Policies and Development

Development in any country has three broad dimensions: economic, legal, and social, which are generally interrelated. Since the 1980s, China’s tax policies have had varying effects on development.

Tax Policies and Economic Development

In many ways China’s experiment with economic development has been unique. China is a socialist country governed by a single party. The economy is highly fragmented and in transition toward a socialist market economy. China had no modern tax system until the 1980s. Chinese leadership has always resisted the advice of international experts to go for “big-bang” economic reforms in favor of a more gradual, pragmatic approach.

China’s development goal has been to build up a relatively well-off (xiaokang) society in which people generally are not rich but have adequate food, clothing, and other material goods necessary for a decent life. Economic development is a precondition for reaching this goal.

According to the National Bureau of Statistics, China’s gross domestic product (GDP) grew from 362 billion yuan in 1978 to 21.18 trillion yuan in 2006. In 2006, China was the world’s fourth largest economy measured by the size of GDP, the third largest trader, and one of the largest recipients of foreign direct investment.

Unequal Development

But amid its rapid economic development, China has achieved social development only in certain areas. Poverty has been noticeably reduced. The unemployment rate for 2007 stood at 4 percent in urban areas though it was much lower in rural areas. China’s human development index has improved continuously since the 1990s, according to United Nations reports on human development. China’s global ranking rose from number 101 in 1991 to number 81 in 2007.

On the other hand, there have been increasing income disparities, regional disparities, and urban and rural disparities in China. In the early 19
90s, for instance, the top 10 percent of the population held 40 percent of the savings in China. In 2006, saving deposits in urban and rural areas were 161.58 trillion yuan; the top 5 percent of the population owned about 50 percent of the national savings. Some parts of the country, typically the southeast coastal areas and provincial capital cities, are more developed.

Disparities also exist between women and children and men, and between racial minorities and the more dominant ethnic groups. The Chinese tax system disproportionately benefits men because they are generally the higher income earners. In China women make up a smaller proportion of the white-collar workforce than men do, and the ratio of female-to-male earnings is about 0.82.

The regional disparities and shortages of financial resources at the local level also have had significant adverse effects on women and ethic minority groups. Ethnic minority groups generally live in less-developed regions. A lack of resources at the local level often results in a lack of funding for hospitals, schools, housing, and other public works. Thus local service providers have to charge for their services. Local schools, for example, charge what are high fees for peasants. This has led to a dramatic shift in educational opportunities for women in rural areas. A son is the future “retirement plan” for his parents. A daughter is someone’s wife and will help support the husband’s parents. Thus, in the rural areas and minority areas where the one-child policy is not strictly applied, the daughter is often required to work to pay for the schooling of her brother. The results are that many fewer girls than boys are going on to higher education. Tax policies have played no significant role in income redistribution. By its very design, the tax structure in China cannot play a key role in alleviating inequality in income and wealth. In developed countries, the income tax, especially the personal income tax, has been used as the main instrument for redistributing income. But in China the role of the individual income in redistribution remains largely symbolic. This tax accounts for about 6 percent of total tax revenues. It is progressive only with respect to employment income and business income. Other types of income are taxable at a flat rate. The fraction of population paying the tax grew from 0.1 percent of all wage earners in 1986 to about 32 percent of all wage earners in 2001 and the average amount of annual tax paid by each wage earner was 314 yuan (less than $40) in 2002. More than one-third of the total individual income tax on employment income was collected from workers at foreign investment enterprises. Given the current situations in China, the individual income tax cannot be a meaningful tool of redistribution.

Some provisions of the sales taxes have some progressive features. For example, the consumption tax is imposed on luxury goods and services at progressive rates. This tax is presumably borne by high-income earners. The VAT is slightly progressive with a lower rate on certain necessities, such as grain, edible oil, and running water. Overall, however, these taxes worsen the urban/rural disparities because low-income rural residents must pay these taxes. In many poor rural areas, these taxes are the only taxes collected.

Tax Policies and Social Development

Compared with the wide variety of tax preferences for economic development, tax expenditures for social development have been fewer in number and less in amount. Most of the tax expenditures under the individual income tax relate to disaster relief, family planning, payments to military personnel, and retired cadres. These measures are largely in response to other policy decisions and are not designed to promote any social activities.

Arguably, tax expenditures on social development are as important as those for economic development during an economic transition. At a time of increasing income gaps, the economic reforms smashed the “iron rice bowl” style of social security (which was tied to lifetime employment at a work unit) when state-owned enterprises were transformed into “economically efficient” entities. Redundant workers lost their jobs as well as their welfare system, which typically consisted of subsidized housing, medical insurance, and retirement income. The government has not introduced any meaningful tax subsidies for housing, education, charitable donations, child care, medical care, family support, or retirement savings. No specific tax expenditure has been designed to create jobs or workers’ training or relocation. Although the government has flirted with the idea of tax-subsidized retirement plans, no concrete tax policy has yet been enacted.

Retirement income security is a significant social and political issue in China. The Chinese population is aging at an accelerating rate owing to three possible factors: the baby boom in the 1950s and 1960s; the single-child policy, which has produced the four-two-one family structure (four grandparents, two parents, one child); and the increasing longevity of the Chinese people. The percentage of individuals aged sixty and older in the Chinese population was 10 percent in 1999 and is expected to be 20.4 percent in 2030. All this means that there will be fewer young people in the future to pay taxes that can adequately support the elderly.

Since the early 1990s, the Chinese government has regarded employer-sponsored retirement plans as an important pillar in the retirement system and the tax policy as a key instrument for supporting retirement plans. Employer-sponsored retirement plans are expected to supplement the public retirement pillar, which is designed to provide a basic retirement of up to 40 or 45 percent of the average salary at the time of retirement. It is estimated that retirement funds in China could exceed $160 billion by 2030 and become the world’s third largest retirement market. Many enterprises created retirement plans for their workers in order to attract and retain workers in an increasingly competitive labor market. The government introduced regulatory measures in 2004 to require that all retirement plans be defined as contribution plans and be managed in accordance with market principles. Under existing tax legislation, contributions made by an enterprise into a privately funded retirement plan are generally not deductible.

Tax Policies and the Law

Taxes and taxation are complex and create the need for rules, regulations, and laws to oversee implementation and collection, protect taxpayers’ rights, and prohibit abuses by taxing agents. Although China does not have the rule of law, it has enacted a number of tax laws.

China’s primary tax policy objectives are revenue, efficiency, and international competitiveness. Establishing a system of taxation based on clear rules is important in achieving these objectives because tax rules are written to govern not only the relationship between taxpayers and the government but also relationship between the State Administration of Taxation (SAT) and local tax offices and the relationship between the tax administration and other government departments.

In terms of promotion of economic development, predictable and clear tax rules are undoubtedly important. Taxpayers need these rules to arrange their affairs and even to decide whether to invest in China. One reason for the two-track enterprise income tax system was to create a tax system that would be perceived as predictable and fair by international investors. The two-track system is highly discriminative now, but its original rationale was sound in the 1980s. China has always been sensitive to its international image, and creating a rule-based system was considered to an important part of projecting a positive image. This sensitivity helps explain why the foreign track of the tax syste
m is regulated by laws enacted by the National People’s Congress.

Sources of Tax Laws

Tax laws in China include not only statutes (laws) enacted by the legislature but also administrative regulations authorized by the State Council and administrative rules introduced by the SAT. China has three major tax laws (the Individual Income Tax Law, the Enterprise Income Tax Law, and the Tax Administration and Collection Law), thirty or so administrative tax regulations, and about fifty administrative rules. Administrative policies and documents that have no force of law in Western countries have the status of legislation in China. Court decisions do not have the force of law in China.

Since the 1980s, tax legislation has become more detailed and comprehensive. The trend has been to elevate administrative rules to administrative regulations or to tax laws. For example, tax collection and administration had been governed by administrative regulations until 1991 when the Tax Administration and Collection Law (TACL) was enacted. The TACL, with 94 articles, modernized the collection system, set clear standards on the collection of taxes at both the national and the local levels, and established penalties for various violations of the law. It also provided the framework to allow tax authorities more access to taxpayer information and to better define the rights and responsibilities of both tax officers and taxpayers. The implementation rules for the TACL, 113 articles, provided detailed implementation guidance for the supervision and administration of tax collection in China. The TACL, along with the implementation rules, has been acclaimed as a breakthrough in China’s tax administration system.

The Role of the Judiciary

In the area of taxes, the role of the court is limited to adjudicating tax disputes between taxpayers and the tax administration. There are generally two types of disputes. One involves the interpretation of tax legislation to determine tax liability. The other involves taxpayers bringing tax officials to court for wrongful or illegal administrative actions. Because administrative appeals are available to taxpayers in the case of the first type of disputes, most taxpayers resort to administrative appeals. Judicial appeals on matters of interpretation are virtually nonexistent in China. With respect to the second type of disputes, more and more taxpayers bring their lawsuits in accordance with the Administrative Procedures Law. Local tax offices are generally named as defendants in such cases for assessing tax penalties, enforcing tax collections, or other unlawful actions. In such administrative cases, taxpayers have won more than two-thirds of the cases.

The judiciary’s role is limited for several reasons. First, the courts do not have the exclusive power of interpretation: The body that introduces the law has the final power to interpret it. As such, the legislature, the State Council, or even the State Administration of Taxation has the sole power to interpret the meaning of statutory provisions. Since most of Chinese taxes are governed by regulations or rules introduced by the State Council or the SAT, the SAT has the sole power of interpretation in most cases. Even with tax laws enacted by the National People’s Congress (the highest state legislative body) the legislation is vaguely worded, leaving the tax administration with broad powers of interpretation. In the case of entitlement to tax preferences, the legislation generally requires taxpayers to apply to the tax administration for approval before they can enjoy the preferences. This makes it difficult for the court to challenge the administrative interpretation.

Another reason for the limited role of the judiciary is the lack of tax expertise in the judiciary. Tax expertise is concentrated within the tax administration. Although some tax officials have joined private practice, none has become a judge. The small number of tax cases makes it difficult for judges to develop tax expertise. There is a general lack of confidence in the judiciary in treating taxpayers equally in interpretative matters.

Finally, the court and the local tax bureaus are part of local governments. The payroll and benefits of judges and tax officials are determined by the same government. Local protectionism is a serious problem. Local tax bureaus may treat local taxpayers differently than they treat outsiders, whose tax revenue belongs to the central government. The courts’ decisions are sometimes influenced by the local government. Promoting local interest may prevail over the strict application of the law. Personal relationships between a judge and tax officials may also make it hard for the judge to overturn officials’ interpretations.

Tax Administration

The administration of taxes has been increasingly governed by rules and procedures. In addition to the TACL, there are rules governing invoice management, tax administrative reviews, tax audits, internal inspections, assessments of tax penalties, and tax litigation. The administration of taxes has progressed in providing services, becoming more transparent, and respecting taxpayers’ rights.

At the beginning of the economic transition in China in the 1980s, a direct assessment system was necessary because taxpayers were unfamiliar with the tax laws. With the continuing of the transition, direct assessment was gradually replaced by taxpayer reporting. By 1997 a three-part administration system was established: filing of returns by taxpayers coupled with taxpayer services, utilization of information technology, and centralization of tax collection and targeted tax audits and inspections. Taxpayers file tax returns at tax-service centers. Tax collectors are no longer directly involved in establishing a taxpayer’s tax liability. There is less face-to-face contact between taxpayers and tax officials who assess their tax liabilities and thus fewer opportunities for dishonest taxpayers and tax collectors to collude in cheating on the tax system.

Taxpayer services have been improving. Tax officials are required to smile at taxpayers or just be polite and put themselves in the shoes of taxpayers. The move to self-assessment has been accompanied by computerization and information technologies. Opportunities for corruption have been reduced greatly after the computerization of taxpayer records and initial selection of targets for audit.

The level of transparency in the tax administration has also improved over the years. During the early years of reform, many tax documents were labeled “Confidential,” out of reach to taxpayers. Now the SAT publishes tax legislation, interpretation documents, rulings, and other types of information on its website or in print through the China Taxation Press. The SAT is also developing an advance ruling system, especially in the area of transfer pricing. The process of negotiating advance pricing agreements is governed by certain implementation rules.

Taxpayers’ rights are specified in the TACL and Implementation Rules. Taxpayers (and withholding agents) have the following rights: to request that the tax authorities treat the information provided as confidential; to apply for tax reductions, exemptions, and refunds according to the relevant tax laws; to make a statement or to defend themselves against the decision of the tax office; to resort to the process of administrative and judicial review and to request compensation for damages incurred; and to use and disclose illegal activities conducted by the tax authorities and tax officials. In addition, taxpayers have the right to deny a tax inspection if tax officials fail to present a tax inspection certificate and tax inspection notice and to request an extension to file returns and to make tax payments.

Tax authorities and tax officials are requir
ed by the TACL to be independent and impartial in enforcing tax laws, to act with integrity and courtesy, to respect and protect the rights of taxpayers and withholding agents, and to avoid conflicts of interest when carrying out collections or investigations. If taxpayers’ rights are unlawfully infringed upon or violated, taxpayers can sue for damages. Tax officials may be sued for inappropriate conduct, such as withholding or seizing taxpayers’ accommodations (including residential property), misusing daily living necessities in enforcing tax collections, or abuse of power. Penalties are enforced on tax officials who show favoritism; commit malpractice; fail to report criminal acts to lawful authorities; retaliate against taxpayers for reporting tax officials’ wrongdoing; intentionally delay, advance, or allocate revenue quotas; or wrongfully collect taxes.

To secure revenue, the SAT has worked hard to introduce rules to clarify the obligations and rights of taxpayers as well as those of local tax offices and other government agencies. The head office of the SAT does not actually collect any taxes, the SAT requires clear tax rules to guide and monitor the work of local offices. Clear rules also enable the SAT to fend off the interference of local governments with tax collection. In principle, national taxes are collected by the local offices of the SAT, and local taxes are collected by local tax bureaus. For example, income tax owed by state-owned enterprises under the control of the central government is collected by the SAT, while other types of domestic enterprises pay taxes to the local tax bureaus. Under the previous central planning model, enterprises were managed by different level of governments. This legacy has continued into the current tax system. Since the SAT has only a weak supervisory role, and there is no effective system for distributing and enforcing common policy, the SAT sometimes has to rely on more clear and authoritative legislative rules to carry out its policies.

To ensure productive cooperation between the SAT and other government departments (such as the police, the People’s Bank, and the courts), the TACL specifically provided the obligations of these agencies in enforcement. In the absence of legislative rules, departmental conflicts or noncooperation could be a serious problem. A lack of support from the police has been a main reason for the SAT to request a special tax-police force and a specialized tax court. To regulate departmental relations, the rules must come from a superior body, the State Council or the National People’s Congress. That is why the TACL is one of three pieces of taxing statues enacted by the NPC.

The excessive use of tax expenditures as policy instruments threatens not only revenue collection but also the effectiveness of tax policy and respect of the SAT and tax legislation. There is a misconception that the tax system is about obtaining preferences as opposed to collecting taxes. Once these preferences are considered tradable commodities, they breed corruption and disrespect for the tax system. Because most tax preferences are granted at local levels, they provide opportunities for local protection. More centralized rules are expected to deal with these problems.

The number of tax professionals who assist taxpayers in tax planning, compliance, and dispute resolution has been growing. At present, tax practice is dominated by accountants. On average, 30 percent of the revenue of accounting firms is from tax work. Lawyers are also engaged in tax practice but on a much smaller scale. There are also more than 62,000 certified tax agents, including 20,000 active practitioners who assist taxpayers with compliance, dispute resolution, and other dealings with the tax administration.

A Homegrown System

Overall, the Chinese tax policy is generally compatible with China’s culture and politics. The best tax policy is one that suits local conditions, and China’s tax policy is largely homegrown. At the same time, international influences have helped shape China’s tax policy. The Chinese have always used foreign ideas to meet Chinese needs.

Development is a universal issue, but the path to development is unique for every country. As an instrument of social development, the tax policy has not been used much in China. Redistribution of income has been minimal. Social spending through tax expenditures is insignificant. On the other hand, China’s tax policy has spurred economic development and contributed to major changes in the legal system.

Ultimately in China everything is political. All reforms, changes, and development have taken place within the confines of socialism and under the leadership of the Communist Party. This distinct model of development defines China’s distinct tax policy.

Further Reading

Brean, D. J. S. (1998). Taxation in modern China. New York: Routledge.

United Nations Development Programme. (2008). Human Development Report 2007/2008: Fighting Climate Change: Human Solidarity in a Divided World. New York: Palgrave Macmillan.

Li Jinyan. (1991). Taxation in the People’s Republic of China. New York: Praeger.

Li Jinyan. (2005). Relationship between international trade law and national tax policy: A case study of China. Bulletin for International Fiscal Document, 59(2), 77–87.

Li Jinyan. (2006). China’s individual income tax: A 26-year-old infant. Tax Notes International, 3(4), 297–302.

Li Jinyan. (2007). Fundamental enterprise income tax reform in China: Motivations and major changes. Bulletin for International Taxation, 61(12), 519.

Lipsher, L. E. (2007, January 17). China’s new era goals: More transparency, less income disparity. Tax Notes International, 149–151.

Tan, S., Lu, D., & Kadet, J. (2008, May 5). China outlines criteria for high–tech companies. Tax Notes International, 369–373.

Wang Zhenhua. (2007, April 2). Corporate tax reform in China: Background, features and impacts. Tax Notes International, 97–103.

Source: Li, Jinyan, & Huang, He. (2009). Taxation and Taxes. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 2198–2206. Great Barrington, MA: Berkshire Publishing.

Taxation and Taxes (Shuìsh?u y? shuìzh?ng ?????)|Shuìsh?u y? shuìzh?ng ????? (Taxation and Taxes)

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