In a move to placate public anger over an increasing income gaps, a joint investigation is reportedly being undertaken by China’s tax bureau, the foreign-exchange watchdog, financial crime investigators and regulators of the publishing, broadcasting and sports bureaus.

‘Yin-yang’ contracts

A task force has been assembled, headed by a vice-ministerial level police official and an expert in the investigation of commercial crimes and money laundering, according a report in the South China Morning Post. The cause of the action came from a popular TV host Cui Yongyuan, who blew the whistle in June on a prevalent practice in China’s entertainment circles to help highly paid celebrities evade tax: dual accords known as ‘yin-yang contracts,’ which splits remuneration agreements into a copy for tax officials and a private copy for the actor. China has been working on tightening up tax collections in recent years especially tax evasion by mid-size and small enterprises. The tax schedule has been adjusted partly in response to the US government’s tax cuts to avoid capital from rushing offshore. China’s government revenue increased by 4.5 per cent in 2016, the slowest annual increment since 1986. The top rate in China’s tax code is 45 per cent.

Tax-havens

To avoid these taxes, many high-income earners channel their remunerations to their own studios or production houses, which qualify as small businesses, liable for 6 per cent in taxes. That is not even counting the tax breaks, rebates or other forms of incentives provided by local authorities in some of China’s backwater cities that are setting themselves up as the low-tax havens for the entertainment industry. The use of a low-tax haven is not illegal, but is unpopular among people struggling in a difficult economy. The issue also coincides with a crackdown on conspicuous consumption since 2012, when Xi Jinping’s government banned ostentatious displays of wealth by public servants, ranging from stringent caps on overseas trips to limits on expenditures for public events, gifts and dining. A second part of the coordinated investigation by Chinese authorities involved illegal remittances of cash, in contravention of the country’s strict capital controls.