Changes, Changes, Changes. Taxes after the VAT reform.

By Richard Hoffmann, ECOVIS Beijing China

The customer:

A manufacturing company from Germany – delivery of machinery to China

The Issue:

Our client delivered his product (machinery) to China.  He helped with the installation of the machine and also trained the staff members of his client to use the machine.

ECOVIS Beijing China was asked to give some advice on which taxes our customer had to pay.

The Solution:

We could provide the following information for him:

1. For the sale of the machine in his case, a VAT (Value Added Tax) rate of 17% and custom duties had to be paid.
2. For the installation and training services he had to pay 6.72% VAT and surcharges (before the reform it was 5.6% Business Tax and surcharges). The 6% VAT could be credited by the customer.
3. Due to the fact that the installation and the training did not take longer than 6 consecutive months  a withholding tax exemption application could be submitted to the tax authorities.

Given the case that the application was not submitted or not approved by the tax authorities he would have had to pay withholding taxes. The withholding tax rate is calculated by multiplying the deemed profit rate with the Corporate Income Tax (CIT, currently 25 %).

For example, a company with a deemed profit rate of 25% would have to pay 6.25% withholding tax (25% * 25% = 6.25%).

In practice, the withholding tax rate that has to be paid is often subject to unforeseen and frequent changes. It can differ from case to case and is therefore not generally predictable.

The company’s benefit:

Fortunately, our client’s application for withholding tax exemption was approved so that he had no obligation to pay withholding tax. We updated our client on the latest changes in tax regulations after the VAT reform and thus, he could save a high amount of money. With the so caused planning reliability he was able to develop his further steps and investments in China.

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