(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

HONG KONG - China’s new extraterritorial tax rules could strain international relations. Beijing wants citizens to pay income tax no matter where they are in the world, just as the United States does. The timing is odd, and cooperation will come reluctantly.

A push to spread the fiscal net overseas accelerated in January, when authorities published policies on how money earned elsewhere would be calculated. The scope is broad, including salaries, earnings from businesses, and capital gains from real estate sales or financial assets. In theory it will apply to millions of passport holders working outside the People’s Republic. Collection efforts will start in Hong Kong this year, reports the South China Morning Post.

It’s a curious political moment for the initiative. The 100,000 or so mainlanders working in the Asian financial hub appeared to be generally supportive of the crackdown on pro-democracy protests, in part because of social tensions with Cantonese-speaking locals. Indeed rumours swirled that Beijing would order state-owned enterprises to hire more mainlanders, expanding its base of political sympathisers. The city’s 15% personal income tax rate was an incentive for them to relocate, but no longer.

As a developing economy with lower living costs and wages, China has lower tax brackets. The top U.S. rate of 37% kicks in at over $518,401 for individuals, but Chinese people pay 45% once their taxable income crosses $137,000. That’s 12 times the average annual wage on the mainland, but only twice the Hong Kong average. In addition, while the United States excludes the first $105,000 earned overseas, there is no such carve-out in Chinese law. With this change, offshore locations with lower taxes but higher wages and rents – like Hong Kong and the United States - become less financially attractive.

Enforcement will be easy in Hong Kong, and vassals like Laos and Cambodia will kowtow to Beijing. But more yield would come from docking top earners in New York and London. U.S. clout enables it to enlist financial regulators overseas to monitor its citizens’ bank accounts, discouraging evasion. Beijing’s tax collectors may not get similar practical cooperation, but expatriates will get the message: We regulate you everywhere. And that may be the point.

 

CONTEXT NEWS

- China has started tracking down some of its citizens living abroad to collect taxes, the South China Morning Post reported on July 10, citing unnamed sources, following a revision to tax rules designed to make it easier for Beijing to collect income earned by Chinese expatriates.

- State-owned enterprises in Hong Kong told employees holding mainland passports to declare their 2019 income to pay taxes on it at home, according to the report. China’s highest tax rate is 45%, applied to those earning more than 960,000 yuan ($137,000) per year, whereas Hong Kong’s rate is capped at 15%.

 

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Una Galani and Sharon Lam) ((pete.sweeney@thomsonreuters.com; Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net))