Nov. 14 – China announced earlier this week that beginning January 1, it will reduce value-added tax (VAT) for all industries in an effort to encourage movement from the current production-based VAT regime to a consumption-based one. Under the new system, the VAT-IN paid on importation or local purchase of production equipments will be deductible, which represents good news for most manufacturing companies as the measure are expected to reduce the VAT burden for all industries by more than RMB120 billion next year.

However, this change may bring to the end of the two current VAT policies for”Encouraged Project” companies: VAT exemptions on imported equipment, and VAT rebates on domestic purchased equipment. In simple terms, this means that beginning next year, manufacturing companies importing equipments should pay VAT-IN immediately, only after which can the VAT-IN be credited from VAT-OUT arising from local sales products, or be refunded for export sales of manufactured products.

This could adversely affect a company’s cash flow as there will be a need to increase fund reserves to pay for the VAT in advance. For those companies engaged in transfer sales with local customers, please note that the VAT-IN paid on imported equipment will not be allowed to be refunded. In another words, it will be an additional cost under the new VAT system.

Companies belonging to the “Encouraged Projects” category are advised to import equipment before the end of 2008 while their VAT and customs duty exemptions still apply.

Companies belonging to the “Non-Encouraged Projects” category can delay equipment purchases until after January 1 to enjoy the new tax benefits.

For more information on China’s VAT regulations, please contact tax@dezshira.com or visit www.dezshira.com.