Post VAT Reform: Defining Small Scale and General Taxpayer Status in China

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By Jake Liddle

China fully implemented the business tax (BT) to value-added tax (VAT) reform on May 1, 2016. The State Administration of Taxation (SAT) issued an announcement in April 2016 regarding the VAT reform, clarifying the calculation and determination of small scale taxpayers and general taxpayers, and changes to the terms of application for general tax payer status. As a general tax payer, entities may enjoy VAT deductions; therefore, it is important for companies to ascertain if they are qualified to apply for general taxpayer status.

The announcement provides that the threshold of small scale taxpayer/general taxpayer is RMB 5 million annual taxable sales amount. 12 months is the longest operation timeframe in which enterprises must calculate annual sales amount in order to ascertain general taxpayer status. However, if an enterprise surpasses RMB 5 million sales in a shorter timeframe, general taxpayer status must be applied for in the following month, and should not be delayed until the 12th month.

For calculation of annual taxable sales for taxpayers prior to the pilot scheme, the following formula applies:

Annual taxable sales amount of the taxable acts = total turnover of the taxable acts over not more than 12 consecutive months ÷ (1 + 3%)

The following table details the taxpayer status designated to different entities:^B9BF974A1F0CA0F433E67FD451A5D500929886EFF8BF8E9F39^pimgpsh_fullsize_distr

Changes to terms of VAT general taxpayer status applications

Taxpayers or entities who fit the requirements for general taxpayer can register with the relevant tax authority.  As shown in the above table, an exception is made for pilot scheme taxpayers whose annual taxable sales amount, prior to implementation of the VAT reform pilot scheme, does not exceed RMB 5 million. Those taxpayers are able to register as a general taxpayer, given they implement proper accounting methods and are able to provide tax information accurately for application.

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It must be noted that once general taxpayer status has been obtained, the transition back to small scale taxpayer is not possible, unless otherwise stipulated by the SAT. Pilot scheme taxpayers who obtained general taxpayer status prior to implementation of the VAT reform pilot scheme are not required to register for general taxpayer status again.

Conclusion

China’s tax system is evolving rapidly and, as a result, can prove hard to navigate for foreign companies. It is important for companies to be aware of the risks associated with non-compliance, to know what category of taxpayer they fall into, and what advantages they have by gaining general taxpayer status.


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