VAT Reform China: The Pilot Policy Extended of to Nationwide for Value-Added Tax (“VAT”) in Lieu of Business Tax (“BT”)

By Pingwen Hu, ECOVIS RUIDE CHINA, Shanghai

The pilot VAT reform policy initialized in Shanghai from January 1, 2012 will finally be pushed to nationwide. Recently, the Ministry of Finance and the State Administration of Taxation has announced CaiShui [2013] No.37, “the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries”, which would be carried out from August 1, 2013. Although a large number of related policies will be abolished and replaced, in general contents, there is little difference between the new policy in CaiShui [2013] and the pilot policy already implemented by certain provinces and municipalities.

Certain regulations, which were set to eliminate the regional difference between “pilot area” and “non-pilot areas”, have no existence necessity and would be cancelled under the new policy.

Introduction of new contents

Following the main adjustment in the new policy are listed out：

1)     Originally, the taxable service under the pilot reform policy include the service of land transportation, marine transportation, air transport, pipeline transportation, R&D and technical services, information technology services, culture creativity services, logistics supporting services, Tangible Personal Property leasing services, identification and consulting services. The “radio, television and film services” has also been added to the taxable service. (following are combined to be mentioned as “taxable service”)

Note 1:  The specific scope of taxable services shall be carried out according to the “Annotations of Taxable Services Scope” enclosed in CaiShui [2013] No.37, which has little changes compared with the replaced regulations.

2)     The scope of deductible Input-VAT has been further clarified. The “tax-control uniform invoice for the sales of motor vehicles” has been added as one type of deductible Special VAT invoice. In addition, the calculation method for VAT deduction would be limited to the sole scenario of “acceptance of railway transportation service” (the deductible input VAT is calculated by 7% of the transport invoice amount)

Note 2: The new policy has cancelled the limit for the Input-VAT deduction on “Motorcycles, cars and yachts which consumption tax is payable”, and it indicates that if the purchased car is used for normal operation and the tax-control Special VAT invoice is obtained, the input-VAT is allowed to be deducted.

Previously, the transportation service provider in the “non-pilot areas” could not issue the special VAT invoice. For their clients, the ordinary invoice issued by them is deductible by calculating 7% of the invoice amount. Along with the nationwide implementation of the pilot policy, the regional difference would disappear.  All the transportation service providers (except for railway) in different areas have been included in the pilot policy and could self-issue or apply to issue the deductible Special VAT invoice to its clients.  Therefore, the calculation method would solely apply to the railway transportation service.

3)     For calculation the VAT payables, the Treatment of “Balance Taxation”, deducting certain cost/expenses from taxable income, would also be limited to the sole scenario of “Financing lease of Tangible Personal Property”, due to the reason that most of the input-VAT for such industry’s cost could not be obtained.

Note 3: The Treatment of “Balance Taxation” would be abolished. For certain taxpayers, the tax burden would be increased. For example, the exhibition hall rental fee paid by the Exhibition organizers, and the internal freight charges paid by the Class A forwarder, would not be deductible from its income any more, these taxpayer also could not obtain the corresponding Special VAT invoice for deduction.

And at the current stage, it is unknown whether any other policy would be introduced later.

4)     Where a taxpayer provides taxable services for which the rules of exemption and zero tax rate shall apply, the zero tax rate shall be applied in priority.

Other newly published circulars related with the pilot policy mainly include:

(1)   Announcement of the State Administration of Taxation on Qualification Recognition for General VAT Taxpayers under the Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Service Industries (Announcement 2013 No. 28 of the State Administration of Taxation)

(2)   Announcement on Issues concerning the Filing of Value-added Tax Returns by Head Offices and Branches as Pilot Taxpayers in the Pilot Collection of Value-added Tax in lieu of Business Tax (Announcement 2013 No. 22 of the State Administration of Taxation)

The Announcement No. 22 applies to certain taxpayers, who could file VAT returns by head offices and their branches on a consolidated basis, and this policy is narrowly applicable, as these taxpayers should be approved by the Ministry of Finance and the State Administration of Taxation in advance. While the Announcement No.28 has further clarify the application of the General VAT Taxpayer’s Qualification, which shall be paid attention to, especially for the newly established company, or small-scale taxpayer having the plan to apply for General VAT Taxpayer’s Qualification.

The main points are:

The distinguish between “can” and “should”

(the annual turnover is the taxable service income within an operation period less than 12 months successively)

-If a taxpayer engaged in,

-sales of goods, provision of processing, repair and replacement service;

-or provision of taxable service;

The taxable sales amount of goods and labor and the taxable services shall be calculated separately, and the standards for the confirming of the qualification as general value-added tax payers shall be applied separately. It could be assessed as the General VAT Taxpayers if one type of sales has touched the corresponding criterion for sales volume.

Our opinions and suggestions

Along with the implementation of the new nationwide policy, the input-VAT for the purchased car would be deductible.  As the calculation method for deducting input-VAT and the Treatment of “Balance Taxation” would be abolished, the tax treatment of General VAT taxpayer would be less complicate, e.g. for the Forwarding Industry.

However, the new policy is also a two-edged sword, which has increased the tax burden of the some taxpayers of special industry. As the new policy would have different affects on every individual enterprise, we suggest that companies should carefully assess policy changes impact on their own, and make preparation for the unfavorable factors if any.

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