China's VAT Reforms Continue
The final batch of industries have begun transitioning to China’s VAT regime.
In 2012 China initiated trial reforms of its indirect taxation system, with a goal to shift the country’s services sector
from business tax, a turnover tax on businesses, to VAT, a turnover tax collected by businesses and ultimately borne by the end user. These reforms began in Shanghai and at first included transportation services and certain modern services, such as logistics, R&D, design, and consulting. Within a year, it became clear that participation in the VAT
system decreased the overall tax burden for most businesses, and ten more provinces were included in the reforms. By 2015 the telecommunications and postal services industries had come on board. Now, as of 1 May 2016, the last of the business tax liable service industries – construction, real estate, financial services and ‘life services’ – have begun the transition into the VAT programme.
China’s unique VAT system
Indeed China has implemented one of the broadest based VAT systems in the world. For example, no other country is known to include all financial services and all types of real estate transactions in a VAT system. Additionally, five different tax rates (3%, 6%, 11%, 13% and 17%) are used, depending on the goods or the actual services provided. Of note too is that foreign companies doing business in China are generally not allowed to register for VAT or to claim input VAT credits. When a foreign company provides services to a China-based client, VAT applies and the client must act as ‘withholding agent’ to ensure that VAT is paid. It is thus critical that service contracts clearly delineate which party has responsibility for the VAT and how it shall be paid.
Effects on newly joined industries
For the construction and real estate industries, the VAT rate is 11%. While this appears to be a dramatic increase over the 3% and 5% business tax rates prior to reforms, no absolute comparison of rates is possible. Not only does inclusion in the VAT system now allow businesses to claim relevant input VAT against output VAT, but simplified and/or grandfathered tax methods are also in place to aid a smooth transition. Through the transition period, the overall tax burden is expected to be neutral, while long-term effects will likely depend on the commercial particulars of a given operation or project. With respect to the financial and life services industries, both with a 6% VAT rate, the reforms are expected to be generally tax burden neutral, but with tax decreases in some segments. In total, China-based businesses are expected to save nearly a trillion yuan annually as a result of the reforms.
Finally, although these latest changes essentially complete the VAT reform process, we can expect to see ongoing modifications and adjustments. We can also expect that during the transition, business tax rules will continue to linger, especially where local tax officials see a lack of clarity in the updated regulations.
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Nexia TS, China
Nexia TS, China
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