On Friday, December 1st, 2017, China’s State Council announced revisions of the provisional regulations on VAT. The new regulations became effective immediately.
The VAT reform is a comprehensive project of the Chinese government to gradually abolish the Business Tax (BT) system and effectively replace it with the VAT. The goal is to build a more unified and simple tax system and eliminate any double taxation problems for companies. Additionally, the Chinese government wants to implement significant tax cuts. (see an earlier article for more information on the tax reform)
The VAT reforms were first introduced as a pilot project in Shanghai in 2012, incorporating industries such as certain transportation and modern services before being expanded nationwide in May 2016. Since then, business owners were able to save around 1,7 trillion RMB (approximately 260 Billion US-Dollar) tax money. Now the measures of the tax reforms will be adjusted, some will be expanded, some optimized.
What is the goal of the VAT changes?
The initial reform was supposed to create jobs and boost the economy. Administrative procedures got simplified and taxes, as well as administrative fees, were cut to stimulate innovation and entrepreneurship.
Now, additional measures aimed at further simplifying the taxation process and penalizing fraud and tax evasion. Furthermore, finance, construction, and the agricultural sector, as well as small companies should be able to acquire adequate VAT loans. The reforms shall also be in line with the governmental fiscal expenditures, while the local tax system shall be optimized
What are the VAT changes?
Some of the new measures have greater importance:
- The scale of VAT taxpayers has been adjusted, including groups and individuals engaging in sales services, intangible asset and real estate with tax rates ranging from 6 percent to 17 percent, which effectively abolishes the BT entirely. (Art. 1)
- The tax rate for selling or importing of the following groups have been lowered from 13% to 11%: agricultural yields, agricultural material, fossil gas and fuel, water, print media and audio-visual media as well as specifically determined goods by the State Council. (Article 2, subsection 2)
- Furthermore, a new article has been added to ensure that the recently implemented measures will be in line with upcoming reforms. Regulations regarding VAT payments should be reconciled with the State Council, the finance department of the State Council and the State Administration of Taxation itself to prevent future differences.
Analysis by our Ecovis Beijing tax consultants
Since the VAT for the distribution and import of main agricultural products and yields such as fodder, fertilizer, machines or corn has been lowered, there might be a rising interest by Chinese companies to invest in agriculture. Especially since the VAT on the import of „distillers dried grains “(DDGS) has been abolished entirely earlier this year.
There also might be a rising interest in founding companies, since there should be no dual business tax issues and since the taxation system, in general, has been simplified. If you have questions regarding this matter, feel free to contact our tax consultants anytime.
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Elizabeth Shi is a Senior Tax Manager at Ecovis Beijing. She has over 10 years of working experience in China´s legal, tax and business field. Prior to joining Ecovis, Elizabeth has worked in the Big Four accounting firms’ tax and business advisory departments. She has advised companies on various China tax and legal related matters, including dealing with tax and other government authorities. Her expertise covers tax compliance, restructuring, M&A, tax due diligence, liquidation and deregistration related tax matters as well as tax planning for companies and individual expatriates. Elizabeth started her professional career as a legal consultant in a prestigious IP firm, working on foreign direct investment (FDI) and intellectual property (IP) projects. With her legal background both in academics and in practice, she has a profound understanding of China’s tax system and its operation. For further information please contact:firstname.lastname@example.org
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