Value Added Tax Reform in China
1. What is the history of China’s business tax system?
a. For many years China has operated a duel system of indirect taxes. They have applied a “Value Added Tax” (VAT) to the domestic purchase and sales of goods as well as the importation of goods.
2. What other taxes have applied to businesses?
a. Most services have been subject to “Business Tax” (BT)
3. What have been the tax rates typically for the VAT and the BT?
a. Typically the VAT has been 17%. By contrast, the BT has been 3% to 5%.
4. Can you please explain in more detail the differences between a VAT and a BT?
a. A VAT primarily applies to the sales of goods. A VAT is applied at 17%, possibly less on the sales and importation of goods. A party who is subject to a VAT can deduct the amount of VAT paid on the amount of goods purchased from the amount of goods sold. This allows the party being taxed to avoid direct taxation by taxing only the value added at each stage of production.
A BT applies to taxable services. A BT is levied at the rate of 3% to 5% usually on the transfer of intangible assets, immovable assets, immovable properties and/or non-VAT taxable services. A BT does not allow an input tax credit and thus results in a higher tax burden as well as price distortions.
5. Have there been any recent reform of the VAT system?
a. Yes, on January 1st, 2012, China commenced a VAT pilot program for the transportation and modern services industries in Shanghai, replacing BT and in the process, introducing 2 new VAT rates: 8% for modern services and 11% for transportation.
6. What is the objective of the VAT pilot program?
a. The objective was to ease the tax burden on services companies and to offer potential subsidies to companies that may pay a higher tax rate due to reform, even though this might result in a drop in tax revenue for the Government.
7. What have been the results of the pilot program thus far?
a. In the first months of 201, the reform had eased tax burdens by RMB 40.6 billion (USD 6.57 billion) for 1.29 million businesses in the nine regions that first piloted the scheme.
8. Have there been other recent reforms of Chinese tax laws?
.a. On May 27, 2013 the PRC Ministry of Finance (MoF) and the State Administration of Taxes (SAT) issued Tax Circular No. 37 (Circular 37) to extend the BT/VAT reforms to all over the country starting from August 1, 2013. This Tax Circular replaces and incorporates the past circulars issued for the purpose of the pilot reform.
9. What VAT applies to export of service under Circular 37?
a. A VAT of 0% applies for international transportation services and design services provided to foreign customers.
10. What other exportable services, if any, are exempt from VAT?
a. (1) Unlicensed international transportation
(2) Leasing tangible movable property with the object of the lease to be used outside of China
(3) Engineering as well as exploration services with the related project or mineral resources located outside of China
(4) Technology transfer, technology consulting, energy management services (except where the object of the energy management contract is located in China) provided to overseas entities
(5) Software services, circuit design and testing services, business process management services provided to overseas entities
(6) Convention and exhibition services located outside of China
(7) Trademark and copyright transfer services, intellectual property services provided to overseas entities
(8) Advertising services where the related advertisement is released outside of China
(9) Warehousing services where the location of the warehouse is outside of China
(10) Logistics and ancillary services provided to overseas entities (except warehousing services)
(11) Certification, verification and consulting services provided to overseas entities (except for services in relation to goods or removable property located in China)
11. Are foreign tax payers subject to VAT?
a. Yes, foreign tax payers providing Taxable Services to their Chinese counterparts are also subject to VAT.