SUN
WUKONG China investors face taxing
challenge By Wu Zhong
HONG KONG - Chinese citizens are not the
only people falling victim to rampant abuse of
power by local mainland officials; foreign
investors also frequently have a hard time,
particularly those involved with small and
medium-sized businesses from countries or regions
where there is strict rule of law and who are not
used to developing good guanxi or
connections with local officials.
Some
have to close their businesses and pull out of
China as harassment of local officials become
unbearable. This is
particularly true in
less-developed regions where officials’ abuse of
power runs more rampant.
Here is a recent
example.
About eight years ago, a
Singaporean businessman surnamed Wang began a
100-million-yuan investment project to build a
hotel in Anxi county, in eastern Fujian province.
His Mingyuan Hotel, the only four-star hotel in
Anxi, started business in 2003.
In a small
place like Anxi, when a new hotel or restaurant
opens business, the chance is that local officials
will come to wine and dine. They normally don't
pay, instead asking the owner to keep their bills
"on record", which often means no payment should
be expected. If the owner is savvy he will waive
the bill to build good guanxi and for
potential exchange for other benefits.
Wang apparently had no knowledge about
such a practice. From time to time, he would ask
his staff to visit the officials concerned and
demand payment of their debts. His boldness
eventually offended officials with the local
taxation authority - whose offices are only a
five-minute walk from Mingyuan Hotel - and Wang’s
nightmare began.
In China, there are
national taxes and local taxes, somewhat similar
to federal taxes and state or city taxes in the
United States. The local taxation authority
oversees the collection of local taxes.
"Officials with the county’s local
taxation authority often come here to have 'free
meals'. Once three of them ate a meal worth 1,400
yuan [US$193], but they refused to pay, saying one
of them was the director of the county local
taxation authority,'' the manager of the hotel
restaurant told the Market News, a sister
publication of the People’s Daily - the flagship
newspaper of the Communist Party. "But in fact he
was just the head of a branch of the authority. At
another time, the director, Huang Zhiyuan, himself
came to eat. When the bill was presented to him,
he said he would let a subordinate come to pay. In
the end no one has shown up to pay the bill."
Records of the hotel in the first three
months of 2007 alone showed that the Anxi county
local taxation authority owed the hotel 18,289
yuan. On March 15, director Huang alone ordered
shark fin and two other dishes, worth 350 yuan -
or close to a month's pay for a local farmer (402
yuan) or a third of the 1,146 per capita monthly
income of Fujian urban residents, according to
government data.
One has to pay to eat in
a restaurant, and government officials must take
the lead in behaving properly well, according to
Wang. "In Singapore, an official who doesn’t pay
for a meal in a restaurant would be sacked," he
said. He blames his current predicament on his
"rigid way of thinking" and ignorance of the local
environment in Anxi.
Urged by Wang, hotel
staff went to demand for repayment from time to
time. "A year ago, my colleagues and I went there
several times to demand payment, but they always
refused to pay. At one time, we were told that our
prices were too high and we should lower the
prices if we wanted the payment. The next time we
went, we were slammed as 'insensible'," the hotel
restaurant manager told the Market News.
"Our staff came back to complain. I could
never understand why we were 'insensible' by
demanding payment of debts? But now I fully
understand, after all that has happened," Wang
said.
On September 25, 2006, a van blocked
the front door of the Mingyuan Hotel, 13 people
got out and rushed to the reception desk, the
financial department and security department of
the hotel. Without showing any official
credentials, the intruders claimed they were from
the taxation authority and had come to check the
hotel’s accounts. The check lasted about half an
hour. Only when the people were about to leave did
they show the hotel a notice about the taxation
inspection.
The next day, the Anxi local
taxation authority paid the debts, about 20,000
yuan, it owed to the hotel. Then came a notice
from the Quanzhou local taxation authority, the
direct superior of the Anxi taxation authority, of
heavy fines imposed on the hotel. The hotel was
ordered to pay Anxi local taxation authority 1.87
million yuan in taxes and fines. After a later
hearing later, the total sum was reduced to 1.2
million yuan.
According to Market News and
follow-up reports by other Chinese media, some of
the taxes and fines listed were ungrounded and
maybe illegal. For instance, the Anxi taxman
demand the hotel pay 656,159 yuan of "urban real
estate tax", which is against national law and
thus invalid, according to Chinese law experts.
Most absurd was that Anxi taxation
authority even levied a 87,380 yuan "hostess tax"
on the hotel - basically equivalent to a
prostitution tax. The figure was calculated as
follows: based on the number of beds, the number
of karaoke TV rooms and the number of sauna and
massage rooms in the hotel, the authority
concluded that the hotel should pay tax for 18
hostesses with 340 yuan for each per month.
According to China’s taxation system,
local governments are entitled to levy certain
local taxes, which however must not violate any
national law or regulation. While in reality,
prostitution is widespread in China, the world's
oldest trade however is still illegal there. To
levy a "hostess tax" would effectively give legal
status to to legalize prostitution, far beyond the
authority of the Anxi local taxation authority.
Hence some law experts and media reports
called the Anxi authority’s action as "punitive
enforcement of law''.
After the exposure
of the incident, the Anxi local taxation authority
insisted it had done nothing wrong and that it had
acted strictly according to the books. As for the
"hostess tax", it said it was a "personal income
tax on high-income persons working in the hotel
industry".
The explanation was partially
true. If the hotel did not chase after the Anxi
authority for payment of their debts, the "books"
might not have been strictly followed. In
exchange, some taxes might have been waived for
the hotel had the local tax collectors been
treated well.
Wang filed a lawsuit against
the Anxi local taxation authority and is now
awaiting a court ruling. Whatever the outcome, he
says he has lost his confidence and plans to sell
the hotel and return to Singapore.
This is
by no means an isolated case, though they happen
more often happen in less-developed regions. So
much so that it seems a vicious cycle has been
developed in China.
In developed regions,
particularly in eastern costal areas where the
investment environment is much better than
elsewhere, officials are more open-minded,
enlightened and law biding. As such, funds from
home and abroad tend to flow into these regions,
boosting their economies.
By contrast, in
less developed regions - which more desperately
need investment from outside - the environment is
less attractive and officials’ abuse of power
tends to run wild. Overseas and domestic investors
hold back from putting money into these regions
out of fear of becoming prey to local bureaucrats.
This contributes to the widening wealth
gap between regions. To narrow this gap,
investment funds should be channeled to
less-developed regions, but to attract such money
the investment environment, including the quality
of local officials, must be greatly improved.
The central government of China has
offered preferential policies to help
less-developed regions to attract investment from
outside. Nevertheless, lessons from the Anxi case
and similar ones clearly show it is equally
important that Beijing find more effective ways to
rein in local officials, if the central
government's goal is to be attained.
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