Beijing Still Dragging Feet On Luxury Tax Reform

Debate Has Dragged On For Months

Cutting one tax among many might not be enough to dissuade Hong Kong-bound tourist-shoppers

Cutting one tax among many might not be enough to dissuade Hong Kong-bound tourist-shoppers

After heated debate this spring and early summer, the issue of China’s notoriously high luxury taxes seemed to cool off over the past few months. However, it appears that the Chinese government may be dusting it off in preparation for a long-delayed tax reform scheme. As China Daily notes this week, policymakers in Beijing are now looking at redefining the word “luxury” to better pin down which items are eligible for luxury tax exemption. From the article:

“It’s an international practice to impose high tariffs on luxury goods, but the rates for luxury goods are changing in accordance with the economic development (of different countries),” Lu Peijun, deputy head of the General Administration of Customs, told China Daily on Thursday.

“Tariff cuts are an issue of the top priority with policymakers. However, the definition of luxury products should be made more accurate to better delineate tariff policies,” Lu said.

With high luxury taxes making everything from imported clothing to electronics around 45 percent more expensive in mainland China than in Hong Kong and 51 percent higher than in the U.S., public support for tax reform remains high. Still, according to analysts cited by China Daily this week, part of the reason Beijing continues to drag its feet comes down to sheer bureaucratic inefficiency. While the Ministry of Commerce strongly supports tariff cuts to spur more Chinese consumers to shop domestically rather than jetting off to Hong Kong, New York or Paris for their luxury shopping sprees, the Ministry of Finance opposes the cuts. And in typically opaque fashion, the latest details announced by Shen Danyang, spokesman for the Ministry of Commerce, were that “it’s unclear whether the two ministries have reached a consensus.”

Chinese tourists shop at a department store in Hong Kong during the Golden Week holiday. (File Photo/Xinhua)

Chinese tourists shop at a department store in Hong Kong during the Golden Week holiday. (File Photo/Xinhua)

Meanwhile, according to the China Tourism Academy, an estimated 2.2 million Chinese traveled overseas during the recent Golden Week holiday and spent around US$2.1 billion, much of it going to luxury retailers in cities like Hong Kong and Seoul. Over the course of the one-week-long celebration, the Hong Kong Tourism Board estimates that nearly 400 mainland Chinese tour groups visited the city daily, with around 700,000 total tourists breezing through Hong Kong and leaving HK$4.2 billion (US$540 million) behind. In all, according to figures (which we have not been able to verify) from Beijing’s World Luxury Association, mainland Chinese spent some 24 billion yuan (US$3.7 billion) abroad during Golden Week. In stark contrast, domestic spending in Beijing and Shanghai during Golden Week amounted to only 18 percent of that spent in Hong Kong, and revenues in Shenzhen and Guangzhou added up to a measly 4 percent of Hong Kong totals.

While the Finance and Commerce ministries continue their game of tug-of-war in Beijing, the occasional detail about possible tax reform does manage to get out. Wei Jianguo, secretary-general of the China Center for International Economic Exchanges, said this week that cosmetics, liquor and cigarettes will likely be the first high-end segments to see tariffs lowered, as rising incomes mean some of these items “should no longer be categorized as luxury goods.” Wei’s phrasing indicates that categorization of what exactly constitutes a luxury item seems to be a sticking point in the government’s sluggish moves towards luxury tax reform. So with no clear timetable for legislation, it appears that — for the time being — Chinese luxury shoppers with the means to do so will likely continue to, in the words of Wang Jianlin, “sit on airplanes to deliver jobs and tax money to foreign countries.”

 

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