Also includes special heads-up for taxpayers in non-pilot areas
Feb. 29 – Following the experiment in Shanghai, the Chinese government has approved Beijing to become the second city that implements a value-added tax (VAT) reform pilot scheme, according to the state-run China National Radio.
Beijing’s tax authorities are in consultation with the city’s 54,000 business tax (BT) payers in order to get prepared for the pilot program set to commence on July 1, 2012. However, it remains unclear how many service sectors will finally be involved in the scheme. In Shanghai – the city that set the first example for such a program – BT impositions are substituted with VAT impositions in six modern service sectors as well as the transportation sector.
By taxing the “value added” throughout of supply chains instead of taxing the business turnover, the VAT reform has the potential to remove the inefficiencies facing businesses that are currently subject to cascading BT, while bringing considerable economic benefits. Areas rolling out the pilot VAT schemes ahead of others will likely become more attractive to service companies.
Therefore, many regions are competing to become the next to introduce the pilot program. China’s other two municipalities, Tianjin and Chongqing, as well as Jiangsu Province and the southern city of Shenzhen, are all in the process of applying for similar VAT reforms.
China aims to spread such reforms to the whole country by 2015, said Zheng Jianxin, deputy director at Chinese Ministry of Finance’s Taxation Department.
However, before China reaches that goal, businesses may find there are some transitional issues for them to address because the VAT program is only practiced in select areas. For instance, when non-pilot taxpayers outside of Shanghai purchase services from pilot VAT payers within Shanghai, what new issues should be taken into consideration?
In a recent case study conducted by global workflow solutions provider LexisNexis, a Shanghai-based service company tried to charge its clients outside Shanghai higher prices due to the “increased” tax rate. Under Shanghai’s current pilot scheme, VAT applies at the rate of 11 percent to transport services and the rate of 6 percent to modern services excluding tangible movable property leasing services. Such tax rates appear to be higher than the BT rates on most services (except entertainment services), which range between 3 percent and 5 percent.
However, since VAT is designed to allow taxpayers a credit for the tax embedded throughout the supply chain, the Shanghai-based taxpayer will very likely end up paying less tax, after recovering its input VAT from the output VAT. In addition, the taxpayer in the non-pilot area may also see its tax burden reduced by purchasing services from pilot VAT payers.
To take full advantage of the pilot VAT scheme, non-pilot taxpayers should gain a thorough understanding of the following regulations when purchasing VATable services from pilot VAT payers:
Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises with their tax obligations. For further advice and specifics relating to these recent measures, please email email@example.com, visit www.dezshira.com, or download the firm’s brochure here.
This article is also available on Dezan Shira & Associates’ online business resource library. To view the article, and other regulatory updates, please click here.
The China Tax Guide (Fifth Edition)
This popular book, fully updated with all recent tax changes and amendments, details all taxes in China affecting businesses and individuals, how to calculate the amounts due, tax registration and filing procedures, tax minimization techniques, and claiming VAT rebates. It also details good financial management techniques, handling negotiations with the tax bureau and annual audit and compliance procedures.
Beijing City Guide
Asia Briefing’s Beijing City Guide is designed for the investor seeking a general overview on China’s political and cultural heart. Also one of the country’s most scenic and historical locations, Beijing’s numerous landmarks such as the Forbidden City and proximity to the Great Wall also make the city a wonderful place to live, work, or visit.
Shanghai Offers Fiscal Support to Promote VAT Reform
China Specifies Services Eligible for Zero VAT Rate and VAT Exemption
Beijing Applies for Implementation of VAT Reform Pilot Project
China’s VAT Reform: General Taxpayer Status and Tax Filing Issues
China’s SAT Details VAT Reform Issues in Shanghai
China to Commence Pilot Project for VAT Reform in Shanghai
Previous Article « Update: Minimum Wage Hikes Across China
Next Article New Issue of China Briefing: Internal Control and Audit »
Dezan Shira & Associates´ brochure offers a comprehensive overview of the services provided by the firm. With its team of lawyers, tax experts, auditors and...
As a legitimate tool for reasonable tax planning and cost saving, tax incentives play an important role. Companies also use tax incentives as a useful...
A firm understanding of China’s laws and regulations related to human resources and payroll management is absolutely necessary for foreign businesses in...
Over the last few months, China has been quickly expanding the pilot program on electronic special value-added tax (VAT) fapiao (hereafter special VAT...
An Introduction to Doing Business in Hong Kong 2021 is designed to introduce the fundamentals of investing in Hong Kong. Compiled by the professionals at Dezan...
Since the formulation of the GBA Initiative in 2017, business communities have placed high expectation on the coordinated development among GBA cities, as the...
Dezan Shira & Associates helps
businesses establish, maintain,
and grow their operations.
Stay Ahead of the curve in Emerging Asia. Our subscription service offers regular regulatory updates,
including the most recent legal, tax and accounting changes that affect your business.