2018-09-05

Chinese SMEs Can Only Survive Through Tax Evasion, Social Security Reform Could Be Killer

Social security reform is a hot topic. Yesterday, I posted Social Security Change Could Cause Layoffs and Shave 1.5pc Off GDP in 2019. Chinese SMEs could be clobbered by rules changes that will greatly increase their social security costs. Workers may also feel the sting if they work for one of the many companies (nearly one-third) who pay the minimum tax. One analyst explains SMEs already face high financing costs, lack of credit among other disadvantages versus large and state-owned competitors. Tax evasion and under paying social insurance costs is a survival strategy. Some firms will likely go bankrupt if the government tries to collect all the back payments in 2019. As he put it, it's like "killing chickens to take eggs."

Nearly 70 percent of companies could find life more difficult next year. One small firm has already made national news because the local tax bureau sued it for 10 years (1.8 million yuan) of unpaid social security.

iFeng: 社保征管政策改变 可能让超七成的企业日子难过
This policy change may make over 70% of companies' lives difficult.

The "heartfelt words" of SMEs.

With the background of the merger of national and local taxes, the social security “division” model, which has been in operation for 20 years, will be transformed into a taxation levy on January 1, 2019.

If it is only the change of the subject, there is nothing wrong with it. This measure will effectively reduce the cost of collection, improve the efficiency of collection, and remove many of the shortcomings of the original "division".

However, the problem is that, in the short run, the taxation of social security may directly lead to enterprises that have not paid or paid less social security, increased management fees and increased labor costs.

"The advantage is that the social security collection is more standardized, and the country collects more money; the disadvantage is that the profits of small and medium-sized enterprises are facing a short-term decline, and serious layoffs may be made. It is difficult for employees to raise their wages again. "Beijing small enterprise HR Shen The lady told the reporter.
Which business burdens have become heavier?

Naturally, the company that originally paid unpaid social security.

51 Social Security White Paper 2018 issued by Social Security (hereinafter referred to as the Social Security White Paper) shows that only 27.05% of enterprises paying full compliance with social security base, and 31.7% of enterprises paying according to the social security base limit.

The implication is that many companies do not pay social security in full.

According to the regulations, the full payment of social security is based on the employee's average monthly salary as the payment base, and pays pension, unemployment, work injury, maternity and medical insurance according to a certain percentage. If the wage exceeds the upper and lower limits (60%-300% of the local average salary in the previous year), the payment shall be made according to the upper and lower limits.

Ms. Shen provided a calculation based on the lower limit of the payment base: the company needs to pay a monthly social security fee of 1,239.59 yuan for each employee.
The combining of the social security system with the tax system may also reveal companies have been under reporting their payroll, both number of employees and salaries, to the social security bureaus:
There is a problem with "dividing". The information of taxation and social security is not interoperable and there is opacity. For example, some companies have registered 5 people in the tax system, and there may be only 3 people in the social security system; in the tax system, the wages of employees are generally higher, and in the social security system, the minimum standards are registered.

“In order to avoid taking too much money, many small and medium-sized enterprises have done this.” Ms. Shen said that after the taxation regulation next year, this operation would be “not sensible”, and the original two accounts became one book, the social security costs will increase and fraud is not so easy.
It's worth noting that many employees collude with their employers because they prefer paying less tax to more. This is a widespread practice at Chiense SMEs.
An employee's payroll provided by Beijing One-listed Technology Co., Ltd. shows that an employee's monthly salary is 20,000 yuan. In the case of full payment, the company's monthly insurance and public accumulation fund for the employee totals 6772.18 yuan.

"Central enterprises, state-owned enterprises, listed companies, etc. are generally more standardized, social security can basically pay in full, non-payment, underpayment are basically small and medium-sized enterprises." Ms. Shen said, therefore, the main impact of changes in the way of collection and management is SMEs .

Jiao Jianguo, a professor and doctoral supervisor at the School of Finance and Public Administration of Tianjin University of Finance and Economics, analyzed that the direct reason is that after the taxation department is unified, the collection rules will be unified and the collection will be more stringent . On the one hand, the function of the taxation department determines its ability and level in the collection and management is higher, it is easier to distinguish whether the enterprise is “hands-on”; on the other hand, the two accounts become one account, both taxation and levy The possibility that enterprises are "hands-on" is getting smaller.
One analyst says the government should slow implementation of the law because SMEs are already struggling:
Qi Chuanqi, deputy secretary of the World Social Security Research Center of the Chinese Academy of Social Sciences, told reporters that at present, considering the pressure on SMEs, the increase in management fees may cause some enterprises to overburden, layoffs and even bankruptcies. Therefore, in the short term, it should be slower . "The current reform lacks support and lacks comprehensive reforms." It is recommended that SMEs reduce their social security contributions and allow them to pay social security at a certain percentage within a certain number of years. It may be fairer.

He explained that the taxation of social security has broken the balance that has already been formed. “Big companies are cheap in terms of land use, financing, and business licenses, and the majority of SMEs can only survive in tax evasion, employment, and employee benefits, so as to gain opportunities to survive in the cracks. Large companies that pay according to the regulations achieve a balance."

He further explained the problem of rebalancing. When new policies are introduced, it is necessary to consider the problems that may arise from imbalances. For example, the taxation department has increased the intensity of collection, the increase in operating costs of SMEs, the shrinking of profits, and the difficulties and pressures faced by the operation are tantamount to killing chickens and taking eggs. Therefore, it is necessary to avoid policy fragmentation and launch a package of solutions. The government should comprehensively assess the impact of a policy on large enterprises and small and medium-sized enterprises.

He further explained the problem of rebalancing. When new policies are introduced, it is necessary to consider the problems that may arise from imbalances. For example, the taxation department has increased the intensity of collection, the increase in operating costs of SMEs, the shrinking of profits, and the difficulties and pressures faced by the operation are tantamount to killing chickens and taking eggs. Therefore, it is necessary to avoid policy fragmentation and launch a package of solutions. The government should comprehensively assess the impact of a policy on large enterprises and small and medium-sized enterprises.

Jiao Jianguo holds the same view on this. He pointed out that the cost of production factors of large enterprises is relatively low, such as land cost and capital cost. Therefore, from the perspective of social responsibility, large enterprises should bear more, small and medium-sized enterprises have a small living space, and social security contributions can be appropriately reduced .
There are different cost estimates floating around. This one says profits and wages could fall in 2019:
According to a report released by CICC on September 4, the large amount of social security premiums paid in accordance with the prescribed base will increase the overall social security costs of the insured enterprises by 14%. In 2017, the total amount of social insurance premiums paid by enterprises is about 5 trillion yuan. That is to say, the standardization of the payment base will increase the social security collection revenue by about 700 billion yuan. The adjustment to the industrial enterprise will drag down the total profit by 3%; the individual's after-tax wage will be reduced by 1.3%.
China is known as low labor-cost destination, but it's social insurance costs are enormous. Here's the hit to companies in various countries. The U.S. is the highlighted line above, China below. According to the table, only Egypt, Germany, Sweden and Japan at the high-end come close to China. The U.S. is 72 percent lower.
Reform will become law in October and take effect in January.

As for the long-term, a higher base for tax collection will lower the tax rate.

iFeng: 社保征管大变革:税务部门全面接手 企业社保成本或增加?
From January 1 next year, the tax authorities will be responsible for collecting all social insurance premiums. The social security contribution base will be implemented. In the short-term, the burden of enterprises that have not paid social insurance in full will increase. In the long run, the reform has created conditions for the downward adjustment of the nominal contribution rate. Experts estimate that if the base of payment is made, the contribution rate of basic pension insurance companies is expected to drop from the current 20% to 14%.
No cuts are expected next year though, or maybe ever:
"First of all, we must establish a strict order for the collection of social security fees, and then consider reducing the social insurance premium rate." Hu Jizhen said that according to his calculations, if the payment base is made, the basic pension insurance enterprise contribution rate is expected to be available from the current 20% dropped to 14%.

"Now the state is raising the payment rate, and did not explicitly say that it is necessary to reduce the social insurance premium payment rate." Zhu Weiqun stressed. However, he believes that the possibility of an increase in the contribution rate is very small and can be understood in good faith as a downward adjustment. "But it certainly will not drop significantly."

A number of experts told the Caijing reporter that it is unlikely that the social security premium rate will be lowered from January 1 next year.

“Reducing the rate depends on factors such as financial affordability and long-term sustainability of social insurance. Complex calculations are needed.” A local financial department also agrees with the above judgment.

Since the social insurance premium base is similar to the personal income tax base, and is also closely related to information such as corporate income tax pre-tax deduction, the social insurance premiums are transferred to the tax authorities, and the collection rate may increase significantly.
Individuals could see their take home pay decline in 2019 because their social security contributions will also rise.
For enterprises that have not paid social insurance premiums in full according to the regulations, the social security burden is likely to increase in the short term, and the increase in social security contributions is directly related to the degree of underreporting the contribution base.

Zhu Weiqun believes that if the problem of insufficient payment of local social security premiums is very serious and involves a wide range of issues, strictly following the social security policy will result in the collapse of enterprises due to payment, and even the large number of enterprises will immediately close down, which will inevitably attract high-level attention and introduce a transition. Ways to ease pressure and maintain economic stability.

For individual employees, if the personal contribution portion of social security premiums has not been deducted strictly according to the payment base, the income will be reduced after the strict collection of taxes and fees in the future, but the social security fees received in the future, such as those received after retirement. The basic pension will increase.
What will happen to consumer spending in 2019? I will take the under on any forecasts that don't include this change to social security.

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