With the completion of China’s value-added tax (VAT) reform last year, VAT has almost completely replaced business tax to become the country’s main principal tax. Expanding VAT to all industries is part of the government’s campaign to streamline China’s complex tax system, encourage the growth of the services industry, and reduce corporate tax burdens.
According to the Ministry of Finance, from May 2016 to June 2017 the VAT reform had already saved companies over RMB 850 billion (about US$127.96 billion) in taxes.
Acquiring VAT general taxpayer status is essential for companies to benefit from the VAT reform’s tax reductions. VAT general taxpayer status allows companies to claim VAT credit and refunds and to issue VAT fapiao – a de facto requirement for doing business in China.
However, businesses must fulfil certain requirements to be eligible for VAT general taxpayer status, and undergo the application process to acquire the designation.
Requirements for VAT general taxpayer status
VAT taxpayers are categorized into general taxpayers and small-scale taxpayers based on their annual taxable sales amount. Taxpayers with annual taxable sales exceeding the annual sales ceiling set for small-scale taxpayers must apply for general taxpayer status (except for individual-owned businesses and entities whose taxable acts are infrequent).
The sales ceilings are:
- RMB 500,000 (US$75,270) for industrial taxpayers, eg. enterprises engaged primarily in the manufacture of goods or provision of taxable services;
- RMB 800,000 (US$120,430) for commercial taxpayers, eg. enterprises engaged in the wholesale or retail sale of goods; and
- RMB 5 million (US$752,700) for VAT reform taxpayers.
Small-scale taxpayers are subject to a lower uniform VAT rate of three percent, as compared to rates ranging from six to 17 percent for general taxpayers, but they cannot credit input VAT from output VAT, nor are they entitled to VAT export exemptions and refunds.
VAT payers whose annual taxable sales are below the ceiling, as well as those who have newly established their business, can voluntarily apply for general taxpayer recognition provided they are capable of setting up legitimate, valid, and accurate bookkeeping.
Additional “soft” or unwritten requirements also commonly influence the local tax authorities’ judgment on the type and number of VAT fapiao available to the taxpayers, such as registered capital, office size, and number of employees.
VAT general taxpayer registration process
To obtain general taxpayer status, taxpayers are required to go through a registration process.
VAT general taxpayer registration occurs at the very end of the corporate establishment process. The general VAT taxpayer status will be effective from the same day the registration is completed. However, there still is an approximately one month waiting period until a company’s VAT system is fully established, which includes purchasing special printers and blank invoices for fapiao and sending a representative employee to participate in training at the tax bureau on how to issue invoices.
In practice, the waiting period might vary largely by region and even by district in one city. For example, in Shanghai, it takes only three to 14 days to establish the whole VAT system starting from obtaining the tax registration certificate.
Additionally, small wholesale companies (i.e., with registered capital of RMB 800,000 [US$120,430] or no more than 10 employees) and companies with previous histories of tax fraud (i.e., VAT evasion amount constituted 10 percent or more of the VAT payable and reached RMB 100,000 [US$12,050] and above; obtained export VAT refund fraudulently; issued VAT deduction proof fraudulently) must pass a three-month and six-month probation period under a tax officer’s supervision, respectively, in order to become fully certified general taxpayers.
The complete VAT general taxpayer application procedure is as follows:
Although the State Administration of Taxation (SAT) formally completed the VAT reform last year, authorities continue to tinker and streamline the system. For example, the SAT eliminated the 13 percent VAT bracket as of July 1, 2017, while free trade zones (FTZs) have been experimenting with a variety of tax and administrative incentives.
As China’s tax system is still undergoing a period of reform, further streamlining of the VAT system and digitization of registration procedures may be on the horizon.
This article is adapted from “Tax, Accounting and Audit in China 2017.” The guide offers a comprehensive overview of the major taxes that foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, and pragmatic guide is ideal for business leaders who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.
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