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Summarized changes for you implied in the business tax to value-added tax changes

(April 1st, 2016)

As had been shared earlier this month once by our Ecovis Beijing office, Premier Li Keqiang on 5 March, introduced the government report and with it the announcement that value-added tax (VAT) is going to completely replace business tax (BT) in 2016 in China.

The measures’ aims: To bring simplicity and equality by avoiding different taxation methods in different regions. Despite relevant rules that shall apply from 1 May 2016 have not yet been disclosed, we still can and want to summarize more of the important implied changes for you, our readers.

The completion of the measure of VAT tax replacing BT is an important part of the Chinese tax system reform. In the early stages of the VAT reform, the pilot program was first implemented in Shanghai and subsequently extended to Beijing and other provinces. During the later period, the VAT reform was implemented to the whole of mainland China and was applied to all pilot industries.

From May 1, 2016, the scope of the pilot program will be extended to the industries of construction, real estate, finance and life services (medical, hotel, catering and entertainment). Furthermore, the input VAT of property could be deducted, in order to ensure that the tax burden of all industries would be reduced.

Focus is on ensuring that no sectors’ tax burden would be increased by the changes. Should in any case the tax burden be increased due to the VAT reform, any such overpaid tax amounts would be returned to the taxpayer in form of financial subsidies.

Although the government work report did not define the applicable tax rates for the new industries, yet based on our calculations  estimated VAT rates are summarized in table 1. As VAT is actually calculated based on the difference amount (output minus input) and the BT on the output only, it’s meaningless to compare the new tax rates (left) with the old ones (right).

Table 1: Estimated VAT rates vs. current BT rates

Industry Industry VAT-rate % Business tax rate %
Construction industry     11     3
Real estate industry     11     5
Finance and insurance industry     6     5
Life services industry (medical, hotel, catering and entertainment)     6     3-20

 

For normal enterprises, especially foreign-invested enterprise engaged in manufacturing business, are already qualified as a value-added tax general taxpayer. They will mostly benefit from the VAT reform as they will obtain more input VAT amounts.  However, the benefits depend on these pending matters that the next few weeks of April should help to bring clarity for:

  • Could general VAT taxpayers deduct interest expenses or loan expenses as input VAT?
  • Could income from interest rates of domestic enterprises gained from loans provided to overseas enterprises be exempted from VAT?
  • Could general VAT taxpayers deduct meal expenses (e.g. employee lunch) as input VAT?
  • Could general VAT taxpayers deduct accommodation expenses (e.g. employee lunch) as input VAT? If yes, should taxpayers book and pay the expense in the name of the company?
  • Can domestic enterprises that provide their overseas headquarters with “marketing” and “purchasing” services enjoy tax exemptions?
  • Could land usage rights obtained through auctions from government departments get approved input VAT deductions?
  • Is there any annual deduction amount or percentage limit for the input VAT occurred from the purchase of real estate?
  • For the second-hand housing sales, shall VAT be calculated based on the sales amount or the gained income?
  • Is the transfer of domestic or overseas real estate enterprise shares or other equity investment applicable to VAT?
  • For factory lease agreements existing before the VAT reform, is there any transition or exemption policy applicable?

 

Ecovis Ruide in Shanghai and Taicang recommend:

Enterprises could review and update their financial structure based on the aforementioned information as well as make preliminary pricing decisions after the VAT reform according to the estimated rates (see table 1).

If you need: Please do not hesitate to get in touch with us via CN, EN, DE on marketing@ecovis.cn or via our website on www.ecovis.cn for more information and/ or support on the matter.



Author:
Pingwen Hu
pingwen.hu@ecovis.cn
Office website

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