State Council Heard the Lamentations of the SMEs, Li Keqiang Call for More Cuts to Taxes, Fees

This past week there was a panic among SMEs following passage of social security reform. It was a top story in the finance section several times. I covered it twice.

Chinese SMEs Can Only Survive Through Tax Evasion, Social Security Reform Could Be Killer
Social Security Change Could Cause Layoffs and Shave 1.5pc Off GDP in 2019

The big issue was collection of unpaid social security. Many companies pay the minimum and find ways to evade taxes such as under-reporting payroll (number of employees and wages) to the social security bureau. Their employees are tax-evading co-conspirators. Under new rules, the tax bureau will take over social security collections and merge the books. If the tax bureau has records of higher employee counts and higher wages, it will come after companies and workers for more taxes. Up to 70 percent of SMEs are evading or underpaying social insurance according to reports. If companies are forced to pay those back taxes immediately, many could go bust. Higher collections might also lead to layoffs, slower hiring, no wage increases, and higher social security payments from workers.

The State Council discussed the issue in their September 6 meeting.

iFeng: 个税社保将有大动作：让个人减负、企业总体不增负

Taxes and social security will have big moves. The State Council executive meeting held on September 6th determined the implementation of the newly revised tax law supporting measures to reduce the burden on the masses; at the same time, it was proposed to study and reduce the social security rate appropriately to ensure that the overall burden of the enterprise is not increased.

In other words, personal burden reduction, the overall increase in business, will affect everyone's money bag.

Pay close attention to research and appropriately reduce the social security rate

From January 1st, 2019, various social insurance premiums such as basic old-age insurance premiums, basic medical insurance premiums, unemployment insurance premiums, work-related injury insurance premiums, and maternity insurance premiums will be collected by the tax authorities.

Since the taxation department has mastered the salary data and has a strong ability to collect and manage, many individuals and organizations that have not paid social security in accordance with the actual wages are worried that the social security burden will increase next year. Even some organizations predict that after the reform of the collection and management system, enterprises and individuals will pay a total of nearly 2 trillion yuan.

Under this circumstance, many experts and scholars have suggested further reducing the social security rate to hedge the increase in the social security contribution burden.

To this end, the meeting stressed that the current cumulative balance of pensions in the country is large, and it can be ensured to be paid in full and on time. Before the reform of social security collection agencies is in place, all localities should keep the existing collection policies unchanged, and at the same time, study and reduce the social security fees appropriately. The rate ensures that the overall burden of the business is not increased, in order to stimulate the vitality of the market and guide the society to anticipate.

This undoubtedly set companies' minds at ease.

iFeng: 李克强：要因时而动、不失时机推出更大“减税降费”举措

Li Keqiang pointed out that considering the current accumulated balance of pensions in the country, it can ensure that the social security collection rate will be maintained in full and on time. Before the reform of the social security collection mechanism is in place, all localities should keep the existing collection policy unchanged, and at the same time, study and reduce the social security rate appropriately. Make sure that the overall burden is not increased.

He stressed that under the conditions of a market economy, "tax" is one of the most important levers for regulating the economy. Adjusting the tax burden is closely related to the life of the enterprise and the people, and at the same time has a huge impact on the overall economic and social development.

"In the current complicated economic situation at home and abroad, we must take the time to move and take the opportunity to launch a larger 'tax reduction and fee reduction' initiative to send a positive signal to the society. This is an important measure to reduce the burden on enterprises and improve China's economic competitiveness. It is also the meaning of deepening the reform of the 'distribution suit' and transforming the government's functions." Li Keqiang said, "In the future, we can only further strictly control the government's 'three public' funds, and reduce taxes and profits for the masses and enterprises. I have said many times that the government will have to live a tight life to let the people live a good life.

Li has been very supportive of SMEs for years, but the burden on them (financing costs in particular) only increased.

Reuters: China vows tax reforms won't boost corporate costs

Counting safety net contributions, the World Bank reckons China’s effective corporate tax burden rate was 67.3 percent last year, much higher than in the United States.

China announced in July that the powerful tax bureau will take over social security collection from the social security bureau in 2019, a move seen enforcing greater compliance by companies as the government frets over an aging population and rising pension deficit.

However, the change has sparked concerns that many companies - especially small- and medium-sized enterprises - subject to stricter tax scrutiny will struggle to stay afloat.

Only 27 percent of Chinese companies comply with the social security requirement and pay the correct amount for their employees, according to a private report published by 51shebao in August.