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China's chosen path to VAT reform

Editor: Li Kun 丨CCTV.com

07-10-2015 17:16 BJT

Exclusive interviews of EY China Tax Partners Stephane Rinkin and Kenneth Leung by Tom McGregor, freelancer based in Beijing

BEIJING:  China has embarked on reforms to transform the country away from relying on manufacturing and exports. Beijing is promoting an economy that focuses on services by introducing tax reforms that would transition certain industries and services from Business Tax (BT) into the (Value-Added Tax) VAT regime.  Since 2012, the Chinese Government has converted a number of service industries into VAT in order to remove BT by the end of 2015.

The last few years have been eventful for China VAT due to significant regulatory changes.  Its VAT Pilot started in Shanghai from 1 January 2012 and from 1 August 2013, transportation and selected modern services have been rolled out nationwide.

In just over 20 months after Shanghai started its VAT Pilot on 1 January 2012, these changes, together with the latest announcement on the addition of Railway Transportation, Postal Services and Telecommunication Services plus other VAT Pilot changes, have illustrated that 2013 and 2014 were crucial years. 

These changes have paved a continued roll-out of VAT Reforms in 2014 and beyond. From 1994 to the start of the VAT Pilot, China's indirect tax system was comprised of VAT and BT.  Beforehand, companies or individuals were required to pay BT on the income derived from the provision of services and transfer of immovable properties or intangible assets, when recipients are not entitled to offset/recover this charge (except in certain limited circumstances where special rules specifically allow BT to be paid on a "net basis"). 

Such structures resulted in a negative tax cascading effect. Additional tax costs were perceived as not facilitating the growth and specialization in the service industries. VAT reforms seek to remove this negative effect, VAT being operated on a credit basis (VAT paid for each transaction as technically creditable against the VAT payable arising from the next transaction) where businesses should not incur a sticking tax cost such as BT.

However, China's VAT credit mechanism relies on special VAT invoices (fapiao). Hence, when VAT Reform gets fully implemented, all businesses must support their credits and transactions with detailed invoices to calculate their taxes in a different manner with a full system composed of: input and output (total VAT liability being equal to VAT output for the period subtracts the VAT input for the period).

The VAT deductibility on certain types of charges is still under discussion. The VAT due on the interest or on hotel and catering charges could limit neutrality of the system. Yet despite such complexities, a VAT regime should incur lower taxes paid than under a BT system for many companies.

Nevertheless, VAT can be complicated and when you add VAT tax exemptions for specified sectors, as well as multiple VAT applicable rates for certain taxable items/industry that could lead to further confusion.

This may explain why China has selected to transition from BT to VAT not through a nationwide rollout, but region-by-region initially and subsequently sector-by-sector. The scope will widen to impact all sectors across China, including: real estate, constructions, lifestyle services and financial services.

"China's VAT reform is different from what other countries have done," EY Greater China Indirect Tax Leader Kenneth Leung said. "Beijing is using VAT reforms to make adjustments by using the new VAT system to support certain industries in the country."

"VAT reforms have remained a changing process here. The government is making adjustments to achieve a stronger service-based economy in the long-term," EY Greater China Indirect Tax Partner Stephane Rinkin said.

Rinkin noted that pushing modern-services can make China more business-friendly, since many multinationals may open regional Asia-Pacific headquarters here. "Accordingly, companies could run more smoothly in the country," Rinkin said.

Additionally, Beijing intends to impose VAT on virtually all types of turnover within the real estate, construction and financial services industries. However, this is different than the VAT treatment for the same industries in most other countries.

"China's VAT reforms have focused on structural changes to support future economic development. Imposing different VAT tax rates for different sectors of the economy could determine who will be the winners and losers in the domestic economy but these reforms are necessary," Leung said.

"Businesses, which will convert their tax systems in the following months, should make preparations soon, since the time given between the issuance of the rules and the effective date of implementation has been only a couple of months." 

"Many companies in the financial services, real estate, constructions, hotels and catering industries have already started their preparations.  Therefore, I would recommend that management teams should conduct impact studies as soon as possible to enable their companies to know what to do next", Rinkin said.


( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )



Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

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