China Fully Implements VAT Reform

Impuestos

Starting from May 1, in Mainland China, the replacement of business tax with value-added tax (VAT) will be extended to construction, real estate, finance and consumer services, to ensure that the tax burdens on all industries will be reduced, which means the end of the history of business tax and the full implementation of VAT reform in China.

Business tax refers to a levy on the gross revenue of a business while VAT refers to a tax levied on the difference between a commodity’s sale price and its cost price. The Chinese government has long imposed VAT on tangible goods, but services are instead subject to business tax.

Aimed at tackling double taxation caused by levying both business tax and corporate income tax on the services sector and boosting the country’s service industries, the VAT began in January 2012 to replace business tax in certain industries, as a major step in China’s structural reform. The reform first hit the transport industry in highly developed cities such as Shanghai and Beijing. After that, VAT reform was gradually rolled out in more regions and service industries, until the extension of VAT to all the service industries all over the country.

At present, the VAT rate varies by industry. An 11 percent VAT would be levied on the real estate and construction sector, while the finance and consumer-services industries will see a VAT of 6 percent. (See below for the rates for various industries) Over time, it is expected that China will try to move towards a single rate VAT system (for all goods and services).

Regarding the implication of VAT reform for doing business in China, here is the comment of some businessmen, “To prepare for the VAT reform, multinational companies need to be aware that this is not simply a tax change—this is a business change. The VAT reform has a number of different impacts on business, in areas such as contracts, pricing, IT systems, supplier and customers relations, and on finance function processes.”

Annex:

COMPUTATION OF VAT IN CHINA

There are two kinds of VAT taxpayer in China by the criterion of turnover of sale goods & services and condition of accounting system. One is normal taxpayer, the other is small taxpayer.

Normal taxpayer

To compute the VAT payable, the normal taxpayer needs to separately calculate the output tax and the input tax for the current period. Then the difference between the output tax and the input tax shall be the actual amount of VAT payable. The formula for computing the VAT payable is:

VAT payable = Output tax payable for the current period-Input tax payable for the current period;

Output tax payable = Sales volume in the current period × Applicable tax rate;

Input tax payable = Purchase volume in the current period × Applicable tax rate.

(When just considering a product, the formula can be simplified as:  VAT payable = Difference between sale price and cost price × Applicable tax rate)

Small taxpayer

Small taxpayers are taxed on the basis of the revenue derived from sales of goods or provision of taxable services by applying proper rates(now it’s 3% for all the sectors) – a simple method. The computing formula of tax payable is:

Tax payable = Sales amount × Applicable rate = Sales amount  × 3%

Importation

The importation goods are taxed on the basis of the composite assessable price by applying the applicable tax rate. The formula for computing the tax payable is:

Tax payable = Composite assessable price × Applicable VAT rate

Composite assessable price=Customs completion price+Custom Duty

(Where the taxpayers import the taxable goods under the Consumption Tax, the Consumption Tax payable shall be included in the composite assessable price.)

 VAT refund for exporters

In case of 0 rate applicable to the exported goods, the exporters may apply with the tax authorities for the input tax refund on those goods exported. At present, the refund rates consist of 3%, 5%, 8%, 13% and 17%.

 

TABLE OF VAT RATES IN CHINA

 

VAT rate

Taxable Items

Basic VAT rate 17% Sale and import of goods(except otherwise stimulated by tax law)
Provision of taxable services
Leasing services of tangible movable property

Low VAT rate

13%

Applies to a range of products such as books, newspapers, magazines, cereals, edible vegetable oils, water supply, heaters, coal products for residential use and other goods as prescribed.
11% Transportation service, postal service, basic telecommunication service
6% Value-added telecommunication, service in modern service industry
Zero rate 0% Exportation of goods(except otherwise stimulated by the state)
“International transportation service, R&D services and design services provided to overseas entities” provided by domestic companies or individuals, and other taxable services stimulated by the state

Collection VAT rate (The computation is the same as “simple method” for small taxpayer.)

3%

Small businesses with a turnover of less than a legally defined annual limit.
Tap water; electric power generated by the small-scale hydroelectric entity of county level or below; sand, soil and stone used for construction; commercial concrete (limited to cement concrete produced with cement); brick, tile and lime produced with sand, soil, stone or other minerals excavated by itself
Consignment service by consignment shop, pawnshop’s selling overdued articles

Collection VAT rate     (The computation is the same as “simple method” for small taxpayer.)

VAT payable =Tax included price/(1+3%) ×2%

The normal taxpayer’s selling fixed assets once used by it, small taxpayer’s selling fixed assets once used by it, taxpayer

 

Acerca de Tomás Lamarca Flinch

Socio fundador de NET CRAMAN, con una dilatada experiencia en derecho fiscal y tributario. Es especialista en planificación internacional, asesorando a compañías españolas y extranjeras en la creación de estructuras fiscales óptimas para el cumplimiento de sus objetivos empresariales. Además, ha actuado como ponente y conferenciante en diversos seminarios sobre fiscalidad nacional e internacional.

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