China VAT Reform

Monday 11 July 2016

By Kathy Siu, Director - Tax

Introduction 

As of 1 May 2016, China’s Business Tax to Value Added Tax Reform (“B2V Reform”) has completed by extending its pilot services to cover all remaining sectors. Business Tax, which has existed in China’s tax system for the past 66 years, is being phased out.

The B2V Reform is a key structural tax-reduction measure in China, aiming to resolve the multiple taxation issues that exist in Business Tax and to improve the input VAT credit chain.

Back on 1 January 2012, the BT2VAT pilot scheme started in Shanghai. Then, from 1 June 2014, the B2V pilot scheme was extended nationwide, covering 10 industries. As of 1 May 2016, Business Tax is no longer chargeable; instead, only VAT is chargeable on all industries throughout China.

The State Administration of Taxation (“SAT”) and the Ministry of Finance (“MOF”) issued Caishui [2016] No. 36 (“Circular 36”) on 23 March 2016, detailing how the final roll-out of VAT Reform will be implemented. Below is a summary of the key points.

Key Points 

There are three main scopes of charges for VAT:

  1. The supply of services
  2. The supply of intangible assets
  3. The supply of real estate

There are two types of VAT payers:

  1. Small-scale VAT payer
  2. General VAT payer

1. Small-scale VAT payer

Annual turnover: Below RMB 5M

Accounting system: No particular requirement

3% VAT rate:  All Services

VAT payable amount: VAT payable = Turnover x 3% with no offset on Input VAT

VAT invoice: Need to purchase from the nearest tax bureau

VAT filing forms: 1 master form + 2 supplementary forms

2. General VAT payer

Annual turnover: RMB 5M or above

Accounting system: Sound accounting system that calculates VAT amounts accurately and automatically

17% VAT rate:

  • Leasing of movable and tangible assets

11% VAT rate:

  • Transportation services 
  • Postal services
  • Basic telecommunication services
  • Construction services
  • Leasing of real estate
  • Sale of real estate/land use rights

6% VAT rate:

  • Financial services
  • Insurance services
  • R&D and technology services
  • Information technology services
  • Logistics services
  • Advertising & exhibition services
  • Consultancy services
  • Lifestyle services, including:
    • Tourism & entertainment services
    • Catering services
    • Accommodation services
    • Cultural services
    • Sports services
    • Medical services
    • Education services
    • Day care services
    • Other services not included above
  • Transfer of intangibles & natural resources
  • Value-added telecommunication services, e.g., SMS messaging

0% VAT rate:

  • Certain cross-border taxable activities specified by the MOF and the SAT shall be zero-rated or exempted from VAT

VAT payable amount: VAT payable = Output VAT – Input VAT

VAT invoice: Issued by the General VAT Payer

VAT filing forms: 1 master form + 8 supplementary forms

Conclusion 

VAT Reform is likely to be the most significant element in the reform of China’s tax system this year. It is a tax-reduction measure in China, with the aims of resolving the double taxation issues that exist in Business Tax, fostering the development of different industries, and meeting the needs of business development in China’s new economy, which is shifting from traditional manufacturing to innovations and service industries.

Equiom welcomes the opportunity to discuss your China tax and VAT situation to ensure that you are compliant and that you are optimising your tax and VAT credits eligibility.


For more information about this topic, please contact Kathy Siu