Steps and precautions companies in China must take to comply with the 2018 VAT Reform
In an effort to reduce taxes by RMB 400 billion, China recently announced cuts on Value-Added Tax (VAT) rates and expanded the criteria for enterprises to qualify as small-taxpayers. Also, the State Administration of Taxation (SAT) and the Ministry of Finance (MOF) defined how to change the taxpayer status from general taxpayers to small-scale taxpayers.
To support this tax reform, SAT issued two important Circulars that explain how to transition:
- SAT Announcement n. 17 [2018];
- SAT Announcement n. 18 [2018].
The tax reform will enter into effect on May 1st, 2018. Companies located in China Mainland or doing business with the P.R.C. shall act promptly to enjoy the tax deduction and comply with the new system. Operations will likely be positively affected by this tax update.
S.J. Grand highlights the main points of SAT Announcements to let you understand how to apply for new VAT rates and which steps to take for being in good standing.
How to Transition from General Taxpayer to Small-Scale Taxpayer
According to Article n. 2 of the Notice of the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) concerning the Standardization of Small-Scale VAT Payers (Cai Shui [2018] No. 33), the general taxpayer who meets the following conditions may choose to register as a small-scale taxpayer or continue to act as a general taxpayer. The transition can be carried out until December 31, 2018.
Conditions:
- The general taxpayer must be registered as such according to Article n. 13 of the Provisional Regulations of the P.R.C. on VAT and Article n. 28 of the Detailed Rules for the Implementation of the Provisional Regulations of the P.R.C. on VAT;
- The cumulative value of VAT sales shall not be more than RMB 5 million for 12 consecutive months before the date of registration (1 months for 1 tax period) or for 4 consecutive quarters (1 quarter for 1 tax period).
If the operation period before the date of transfer registration is less than 12 months (or 4 quarters), the accumulated taxable sales amount (RMB 5 million) should be estimated according to the monthly (quarter) average taxable sales volume. The scope of taxable sales shall be in accordance with the registration and management of the VAT general taxpayer (Announcement N. 6 and 43).
The criteria to qualify as general or small-scale taxpayers is based on the enterprise’s annual revenue. Before the reform, depending on the industry, there were three annual revenues’ thresholds to be qualified as small-taxpayer. Today, thresholds have been unified into one: RMB 5 million. Being a small-scale taxpayer allows you to pay lower VAT obligations.
Taxpayers who are in conformity with the above-mentioned provisions can fill in the registration form to transition from general taxpayer to small-scale taxpayer. They must also provide competent tax authorities with the tax registration certificate. However, taxpayers who have implemented real-name taxation do not need to provide tax registration certificates. Competent tax authorities will handle cases according to the accuracy of provided information.
If the information is correct, the general taxpayer can now be regarded as a small-scale taxpayer (hereinafter “registered taxpayer”).
How to Calculate VAT on Invoices Issued During and After the Transition Period
After the registration period, the registered taxpayer should pay the VAT with the simple calculation method (small-scale taxpayer rate).
During the registration period, the VAT is still calculated as a general taxpayer.
The amount of taxes for which the registered taxpayer has not declared for deduction yet and the tax credit at the registration date should be included in the tax calculation by subtracting payable taxes from input tax to be deducted.
The amount of input tax to be deducted must be verified according to the date of invoice:
- Special VAT invoices, invoices for motor vehicle sales, electronic ordinary invoices, and customs import VAT that have already been obtained before or during the registration period should be approved and certified via audit. If there is abnormity after the audit, they should be checked according to the existing regulations.
- Special VAT invoices, invoices for motor vehicle sales, electronic ordinary invoices, and customs import VAT that have not been obtained in the period of registration should be controlled after the taxpayer obtains the invoices.
As Announcements also take into consideration intangible assets, real estates, and sale or purchase of goods, registered taxpayers must adjust payable taxes accordingly. The transition period may create confusion among the time of issuance of the VAT invoice, its registration in the accounting books, and the date of registration as a small-scale taxpayer. We suggest you avoid purchasing large orders before May 1st, to allow tax authorities better define procedures and set a precedent.
Moreover, the registered taxpayers can continue to use the existing tax control devices to issue VAT invoices.
Once a general taxpayer is again registered as a general taxpayer, it cannot be re-registered as a small-scale taxpayer.
2018 VAT Rates Cuts and Implications
As shown in our complete overview of 2018 VAT rates reform, from May 1st, 2018 VAT will be slashed as follows:
General taxpayers who issued VAT invoices before the adjustment of VAT rates cannot be subjected to the tax adjustment. The ones that issued VAT invoices at the adjustment rate, can enjoy the tax rebate. Nevertheless, as the procedure may get fuzzy, we strongly advise getting in touch with one of our tax experts to guide your staff.
Both general taxpayers and registered taxpayers should timely update the VAT invoice control software, upgrade the tax control equipment, and adjust their internal system. Enterprises in China should inform suppliers and other third parties to collect invoices before May 1st.
Contact us to make sure you are accurately carrying out the transition.
