Transition from Business Tax (BT) to Value Added Tax (VAT)
China will roll out the final phase of VAT reform on 1 May 2016
China has been moving progressively over the past years from a Business Tax (BT) system to a Value Added Tax (VAT) system in an attempt to streamline China’s indirect tax system. The VAT reform project was launched first as a pilot program in January 2012 in Shanghai with an objective to remove dual indirect tax system and to give Chinese business a better global competitive tax structure in order to boost the economy’s growth. Many circulars and bulletins have been issued since then, expanding the reform across cities and provinces and widening its scope to include more industries. In March 2016, China has announced that the final phase of VAT reform will be further rolled out beginning 1 May 2016.
Before the launch of VAT reform program, VAT was imposed on supply of goods, the provision of repair, processing and replacement at a rate of 13% or 17%; and business tax (BT) was levied on other services and transfer of intangibles and immovable properties at a rate of 3% or 5% (entertainment industry 5-20%). However, the co-existence of VAT and BT has led to a number of problems, double taxation being the most crucial one. Those who were paying VAT were able to use input tax credit to offset against output tax credit and thus, minimize their overall tax cost; however, this mechanism was not available to BT payer.
In an attempt to streamline China’s indirect tax systemand align it with global tax practices, the VAT reform project was launched as a pilot program in January 2012 in Shanghai with an objective to remove dual indirect tax system and to give Chinese business a better global competition tax structure in order to boost the economy’s growth. In addition, a unified VAT system should, on the long-term, improve overall tax collections. Indeed, the new VAT system encourages businesses to get VAT invoices when purchasing or selling goods, as a result the whole chain is strengthened since every business, which is paying VAT, will require official invoices for their purchases. Thus, tax evasion through undisclosed transactions is likely to decrease.
Many circulars and bulletins have been issued since its launch in 2012 expanding the reform across cities and provinces and widening its scope to include more industries.
Now the only service sectors that still remain subject to BT are mainly construction, real estate developers, financial and consumer services sectors. And China has announced that the final phase of VAT reform (also known as B2V reform) will be further rolled out to cover these remaining industries beginning 1 May 2016. China will be among the first countries worldwide to apply VAT broadly to the financial services sector.
Two classes of VAT Tax Payer exist under the B2V Reform:
|General Tax Payer (GTP)||
|Small Tax Payer (STP)||
For Small Tax Payer the new VAT rate is a standard rate of 3%, irrespective of the service rendered, but input VAT cannot be deducted.
On the contrary, for General Tax Payer there is no standard rate, the VAT rate varies according to the services industry. In order to have a clear overview of the B2V reform, you will see below a timeline of the B2V reform’s implementation from 2012 to 2016, followed by a table with the new different VAT rates related to the different services for GTP.
Timeline of the B2V Reform from 2012 to 2016:
The B2V reform was first implemented in Shanghai as a pilot program in January 2012 for the following sectors: leasing services of tangible property, transportation services (excluding railway transportation) and certain modern services. Until August 2013, the reform was progressively expanded to the rest of China. Then from January 2014 to May 2016, it was expanded to other industries to finally cover all services sectors.
Summary Table of tax rates before and after the B2V reform:
The new VAT rates indicated in the table are only for GTP. For STP a standard VAT rate of 3% will be applied irrespective of the service sector.
From the 1st of May 2016, all BT will be transfer to VAT and BT will be entirely replaced by VAT.
Below some main impacts the B2V reform may have on companies doing business in China in the following industries:
Businesses in China providing services to overseas clients
Businesses in China providing services overseas may no longer be required to pay VAT. Under the BT system, a 5% tax cost was typically incurred. Similarly, the cost of a Chinese business purchasing services from overseas should also fall by up to 5% since they can claim for a VAT credit for the first time.
Businesses can now require VAT credits when they purchase goods and other fixed assets. And the effective cost of investing in major fixed assets may decrease by up to 17%.
Traditional manufacturing, wholesaling & retailing sectors
Businesses will be able to request VAT credits when they purchase services and therefore benefit from a 5% reduction in the cost of these services compared to the former BT system.
We strongly advise companies to start preparing towards its changes as soon as possible. Please find below some examples of how to get ready for the new VAT system:
Categorize your revenue
- If your company has different revenue types, the revenue should be separated by its types as different VAT rates will apply to different revenue types. If the revenue is not separated by types, the highest VAT rate shall apply to all revenue types.
Review your supplier's position & get the goods Fapiao
- The companies should get in touch with their suppliers to request VAT special fapiaos (instead of general VAT fapiaos) which will be deductible from VAT from May 1 for goods sales and service provider for example: office rental, hotel, insurance fee, commission, or others fee subject previously to Business Tax
- If the supplier is a small taxpayer and consequently cannot issue VAT special Fapiao by himself, you may ask him to go to the Tax Bureau to apply for issuing VAT special Fapiao.
- Please be advised that the companies into Business Tax (BT) industry will start receiving General VAT fapiao after 1 May 2016 but the fapiaos received for payments made before 1 May 2016 cannot be used for deduction against output VAT.
- Please be informed that if your company is subject to Business Tax (BT), Beijing SAT has already started requiring all companies to apply for VAT fapiao and carry out the relevant procedures: http://www.bjsat.gov.cn/bjsat/bsfw/tzgg/201604/t20160401_253747.html
Adapt your organization to the new VAT system
- Train your staff to gain VAT knowledge and understand the key requirements, risks and opportunities.
- Adjust internal control processes and IT systems to deal with VAT invoice management and controls.
- Revise your contract prices if needed : Ensure you can pass on VAT under contracts with your key customers.
- Identify and rectify any potential errors made in VAT filings, including improvements to be made after the implementation of the VAT pilot program.