The Chinese VAT system is similar in many aspects to most Western country´s VAT systems. Who is well familiarized with the international standards, often also knows the right procedure in the Chinese system. In both cases the VAT will be charged on products, services, imports, processing, as well as repair or replacement services. In western countries issued bills state the VAT amount, in China it is the so called Fapiao. The Fapiao´s appearance is quite close to the appearance of a western bill. It proves, that VAT was paid for for the purchased product or service. For the input VAT deduction you need such a Fapiao for all expenses issued in China. However, bills issued in foreign countries, which display the VAT are also accepted by the Chinese government. One of the differences is the General Taxpayer and Small Taxpayer status in China. Small Taxpayer companies cannot deduct input VAT. Here the VAT is just calculated based on the company´s turnover. However they have to pay a smaller tax rate of just 3 %. General Taxpayer companies can give out Fapiaos and deduct input VAT.
Technically a Fapiao and a western bill are identical. Both directly state the output VAT. The difference lies in the strict controls during the acquisition of a Fapiao printing license. This is one of the procedures when gaining the General Taxpayers status. Depending on whether the company´s business is trading or manufacturing and other services, it is also necessary to have a turnover higher than 800,000 RMB or 500,000 RMB. The whole process is very time-consuming and in the end a Fapiao printing machine has to be purchased from the government directly which also only can be set up from the government. Most of the Fapiao´s input VAT which occurs when the company buys products or services, can be deducted from output VAT stated in the Fapiaos when the company´s own products or services are sold. In Germany this is also the case. The expenses on which VAT was paid can be deducted from the VAT based on sold products and services.
The general VAT rate on products is 17 %. Services are charged with 6 % VAT. However there are also some special goods like water, chemicals, gases etc. on which 13 % VAT has to be paid. Some special products like antique books, agricultural articles and articles for disabled people are under certain conditions not taxable.
It is strongly advised to consult your tax expert in order to get the correct tax rate.
Which items are deductible?
Also in terms of the VAT deductible items the German and the Chinese system have their similarities. Generally speaking, all of the expenses which are directly related to the income of the company can be deducted.
- Goods purchase (goods necessary for the production as well as office materials)
- HR costs (except shareholders)
- Facility costs
- Insurance costs
- Car taxes
- Travel expenses
- Advertisement costs
- Amortization costs
- Other expenses like telephone, office material, book, lawyer- and accounting fees ect.
Not deductible are all items which are not directly connected to the acquisition of company income.
- Presents to staff
- Employee trips
- Presents for clients
- Materials which were purchased but were not used for the manufacturing of the products
Additionally to the VAT amount which has to be paid in China, there are local surcharges which are based on the VAT amount. This is a specialty of the Chinese tax system. However unlike the VAT amount which has to be paid to the state tax bureau, the local surcharges have to be paid to the local tax bureaus. The surcharge rates can vary a lot from one city to another. Some cities like Tianjing for example have an anti-flood surcharge, which is not applicable to other cities.
The surcharges in Beijing include:
- 7% Urban construction tax
- 3% Education surcharge
- 2% Local education surcharge
For further, more comprehensive information and assistance please contact email@example.com.
Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact: firstname.lastname@example.org
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