Rising Social Insurance Collections Will Lower Rates, But What About the Evaders

Social security reform has been a hot topic of late. Prior coverage can be seen in these posts:

Social Security Change Could Cause Layoffs and Shave 1.5pc Off GDP in 2019
Chinese SMEs Can Only Survive Through Tax Evasion, Social Security Reform Could Be Killer
State Council Heard the Lamentations of the SMEs, Li Keqiang Call for More Cuts to Taxes, Fees

I'm leaning back towards thinking a policy error could be coming in 2019. One of the consistent themes in recent articles is that rates will come down when more people pay taxes. However, tax evasion is widespread and reports say it is concentrated in SMEs. These firms and their employees (co-conspirators in underpaying social insurance) will bear the brunt of compliance. Large and state-owned firms that already comply with the law will derive the largest benefit from rising compliance.

An example from Jiangmen, Guangdong is given in the article. Its tax bureau began collecting taxes more than a decade ago. Compliance and revenues grew steadily, the tax rate fell. This is the correct long-term forecast, but the question is how does it impact 2019? Reports say many businesses, perhaps around one-third, are making only minimum payments. Employees could be earning as much as 300 percent of the average and only paying taxes on 60 percent of the average salary. In 2019, their wages will stagnate or fall.

iFeng: 社保转税进展:五部门联合推动 为降费率争取更大空间
After the social insurance premiums are uniformly collected by the tax authorities, will there be a substantial increase in the burden of payment? This is also a question that everyone is very concerned about.

According to the requirements of social security contributions, the salary income of the previous year is generally the base of payment. If the wages and salaries of employees are higher than 300% of the average salary employees in the previous year, 300% of the average salary of the local employees in the previous year shall be the base of payment; if the wages of employees are lower than the average salary of 60% of the employees in the previous year, the previous year 60% of the average wage of employees is the base of payment; if the wages of employees are between 300% and 60%, they shall be declared according to the actual situation.

The "Daily Economic News" reporter noted that the vast majority of people belong to the base of payment according to the wages, but the actual situation is that some enterprises have significantly reduced the base payment.

According to Hu Yijian, a professor at Shanghai University of Finance and Economics, “According to the report on social security in 2018, less than 30% of companies pay in strict accordance with the social security system.

At present, among the 36 provinces, autonomous regions, municipalities directly under the Central Government and cities with separate plans, 22 provinces and municipalities have been charged social security fees by the tax authorities.

Generally speaking, in the areas where the tax authorities collect social insurance premiums, the fee base is being implemented year by year, the rates are stable and the income is stable, and the income is growing steadily. For example, in Jiangmen City, Guangdong Province, since the taxation department unified the collection of basic old-age insurance premiums since 2005, efforts have been made to make the actual payment base, promote the expansion of insurance coverage, and the income has grown steadily. From 2005 to 2017, the number of households paying for old-age insurance premiums in the city increased by 8.6% annually, the average annual increase of contributions was 7.2%, the average per capita contribution base increased by 14%, and the average annual growth rate of social insurance premiums was 17.8%. At the same time, the city's rate was gradually reduced from 17% before the transfer to 13%.

The aforementioned people close to the State Administration of Taxation analyzed to reporters that after the tax authorities were responsible for collecting social insurance premiums, the capacity of collection and management would indeed increase, which has already formed a consensus in society. It is necessary to levy the expenses that have not been collected before, so as to gain more space for the overall reduction of the rate. From this point of view, for enterprises that pay according to law, the tax levy will gradually and reasonably decline, creating a more fair environment for the majority of enterprises.

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