China’s Value Added Tax BUSI 3001 SBLC Week 6, Spring 2016 Charles Mo & Company March 27, 20167
What is VAT? History of China’s VAT How does VAT work in China? What are taxable under VAT? Which agency administers the VAT? VAT tax rate How to calculate VAT? Types of VAT taxpayers VAT Reform in time for the financial crisis VAT Reform Implication China’s VAT
A form of consumption tax Buyer – VAT is included in the purchase price Seller – is responsible for collecting the VAT and for paying to the government the VAT collected. Also is only responsible for the VAT on the added value to the product sold. Total Sales price = 234 Net Selling Price = 200 VAT collected (17%) = 34 Total Cost = 117 Net Purchase price = 100 VAT paid in purchase(17%) = 17 Difference = 17 Profit = 100 Pay to government = 17 What’s the difference between VAT and sales tax? Sales tax is also a consumption tax, but it is taxed once at the end to the end user and the tax is collected and paid to the government VAT is taxed each time a product is sold/the ownership is transferred VAT is a national tax. Sales tax is usually administered by the state What is a VAT?
1984- China started an experimental VAT for 31 special products applicable to domestic companies only, but not to FIEs (Foreign Invested Enterprise) December 13, 1993 - The State Council of China issued "The Provisional Regulation of the People's Republic of China on Value Added Tax“ , No. 134 formalizing VAT regulations. November 24, 2006 - issued National Tax No. 156 – regulations of the usage of specific VAT invoice. November 5th, 2008 - Order No. 538 modified and replaced the old No. 134. January 6, 2009 - Finance Order No. 50 published a detailed regulations of Order No. 538 (The VAT reform from 2008 Stimulus Program became effective on January 1, 2009) January 1, 2012 - Shanghai became the test site for the new VAT on Transportation industry and certain service industries. China’s VAT history
In 2002, the revenue from VAT accounted for 47.61% of the state total tax revenue. In 2007, the revenue from VAT accounted for 33.9 % of China's total tax revenues In 2008, VAT is about 1/3 of the total tax revenues In 2009 VAT, the largest single contributor to tax revenues, rose by 3.8 percent to CNY1.88 trillion. The VAT revenues are shared between the central government and the local government by a ratio of 75%:25%. VAT is the major source of tax revenues in China
What kind of sales are subject to VAT? Domestic sales of all products (excluding intangible assets and real estate) Imported products Domestic labor in value added manufacturing, repair, supplementary repair services (i.e. processing and repairing services only), Some service sales – Beginning January 1, 2012 service VAT is charged on services rendered as a trial model in Shanghai Who are subject to VAT and responsible for paying to the government? Manufacturers Retailers Wholesalers Service providers What are taxable under VAT?
National tax Administered by the State Administration of Taxation Import VAT - collected by Customs on behalf of the Tax Administration VAT Revenue - shared between the central government (75%) and local government (25%) VAT Administration
17% Including the old mineral VAT which was only 13% under the old rules. 13 % for the following products: Cereals and edible vegetable oils Utility water, steam, coal gas, liquid gas, bio-gas, and residential coal products Books, newspapers, and magazines Animal feed, fertilizers, pesticides, agricultural machinery, and agricultural membrane 0% for export VAT tax rate on products
Service industry Replacing the current enterprise tax at 5% by two VAT rates 3% - less than 5 million annual revenue 6% - 5 m more annual revenue Certain outsourced foreign service such as design service except for real estate interior and exterior designs may be exempt from VAT. Certain outsourced service by foreign entities Transportation VAT New VAT on service industry
VAT is a tax that is levied based on the turnover of goods and services provided by each taxpayer; it is not a tax based on the taxpayer’s income. Any person/entity engaged in sales of VAT taxable transactions is responsible for collecting and paying the VAT to the government, but the end users pay the VAT on the goods and services. Taxable transactions covered under the VAT are broad in scope, and include the sale of imported goods. Article 1 of the VAT Regulations defines taxable goods to include all items that can be moved from a seller to a buyer. How is VAT taxed?
VAT tax payable = same period OUTPUT VAT on sales – same period INPUT VAT on purchased items If same period VAT on sales < same period VAT on purchased items, unused VAT on purchased items can be carried forward VAT on sales = Sales * VAT tax rate If sales reported appears to be low for no reasonable cause, the Tax Department will review and determine the appropriate sales amount. How to calculate VAT?
The following VAT deductions are allowed: From the seller - VAT specific use invoice indicating the amount of VAT tax amount From the Customs Department - VAT specific use payment book indicating the amount of VAT paid For agricultural products: same as above but calculate the 13% VAT for purchased VAT deductions. For transportation incurred during product sales or manufacturing process - same as above, use 7% to calculate the purchased VAT deductions(now 6%). Must have VAT specific use invoice to be allowed to deduct the purchased VAT. How to determine VAT paid on purchased items?
Specific Use VAT invoice General Use VAT invoice Types of VAT invoice
Types of VAT Taxpayer - Effective January 1, 2009 Small Scale Taxpayers – manufacturing taxpayer with annual sales less than RMB ¥ 500,000; or Wholesalers or retailers of goods with annual sales less than RMB ¥ 800,000. no credit or deduction is allowed for input VAT but only output VAT at a lower rate of 3 percent for all entities. Can apply for General scale if it can maintain a sound accounting system and provide accurate accounting records for taxation purposes
General taxpayers – Subject to VAT at 17 percent based on output VAT minus input VAT. Purchasers pay input VATs and Sellers collect output VATs. If the VAT collected is greater than VAT paid, companies must remit the balance owing. Exporters are eligible to apply for refund on VAT paid. The refund rate is determined and updated by State Administration of Taxation. Types of VAT Taxpayer - Continued
General VAT Taxpayer (17%) Sales amount by producer = 100 VAT tax = 17 Total paid by wholesaler = 117 Sales to retailers by Wholesaler = 150 VAT tax = 25.50 Total paid by retailer = 175.50 Wholesaler owes VAT tax to government = 8.50 (25.5-17) Small VAT Taxpayer (3%) Sales amount by producer = 100 VAT Tax = 3 Total paid by wholesaler = 103 Sales to retailers = 150 Wholesaler owes VAT tax to government = 4.5 VAT Calculation
VAT on imported product = (Customs determined price + Levied Duty + excise tax) * VAT tax rate VAT on imported product is 17% Imported product VAT
Individual consumer VAT exempt products Farmer’s agriculture product Contraceptives Antique books Scientific research/educational imported equipment Foreign government, international organization aids Handicaps imported product Sale of self used products Small Scale VAT Taxpayer Specific Use VAT invoice not allowed in these situations
Effective January 1, 2009 One of the 10 fiscal measures to address the global financial crisis Announced on November 9, 2008 by the State Council Part of the Economic Stimulus Plan amounting to 4 trillion yuan On 11 November 2008, the Chinese Ministry of Finance ("MOF") and State Administration of Taxation ("SAT") organized a press conference, and revealed the details of the VAT reform. Transformation from production based VAT to consumption based VAT 14 November, the Xinhua News Agency released the amended Provisional Regulations on VAT, Business Tax and Consumption Tax approved by the State Council VAT Reform – part of the Stimulus program in 2008
To offset sales, only direct costs attributable to production are allowed, such as: production materials, wage payment and factory expenses VAT included in raw materials Fixed assets purchased including the VAT are depreciated over the life of the fixed assets. This results in a delayed deduction of the VAT over a longer period of time. Production Based Concept
After the reform, the input VAT on fixed assets newly purchased by enterprises can be deducted in full amount immediately. As this move increase the VAT deduction or offset against the VAT upon sales, the immediate benefit is the reduced amount of taxable income. Thus the policy reduces income tax; and it improves cash flow. Consumption Based VAT
Under the old production based VAT, the input VAT incurred on the purchased of fixed assets is not allowed to offset against an input VAT. The input VAT would be capitalized as costs of fixed assets and this creates the problem of multiple taxation. The Transformation is not only aiming to reduce the tax burden on investing on equipment, but also achieving multiple objectives such as, encouraging domestic consumption, promoting advancement of technology, guiding structural developments and stimulate economic growth as a whole. Benefits of Consumption Based VAT
The Transformation applies to "equipment" newly purchased on or after 1 January 2009. The scope of "equipment" covers machines, machinery and means of transportation and other equipment, tools and utensils related to production and operation. Real estate properties such as building and structural improvements are not included in the scope. Deduction for input VAT is specifically disallowed for the purchase of small motor cars, motor cycles, and yachts that are subject to Consumption Tax and could be used for private purposes. Applicable on new purchase of "equipment"
If the amount of input VAT is greater than the amount of output VAT charged on sales within a VAT reporting period, the excess input VAT can be used to offset future output VAT. No refund of excess input VAT shall be granted. Carry-forward of excess input VAT
The VAT collection rates for the small-scale commercial enterprises (4%) and manufacturing and other enterprises (6%) will be reduced to 3%. Since these enterprises will not be benefited from the Transformation which is only applicable to General-VAT taxpayers, such VAT collection rate reduction policy is introduced to alleviate their VAT burdens. Also the MOF and SAT announced that the minimum-income thresholds for collection of VAT and Business Tax will be raised to help the development of small businesses. Reduction of VAT collection rate for small-scale VAT taxpayer
Mineral products have been subject to the reduced VAT rate of 13% with the aim to stimulate development of the mining industry. As the Transformation will allow input VAT to be recovered on equipment to be purchased by mining businesses, the overall VAT burden could be lowered. This, together with the goals to promote resource conservation and environmental protection, the VAT rate of mineral products will be shifted back to the standard rate at 17%. Resumption of VAT rate of mineral products to 17% (from 13%)
Composite Assessable Price Consumption Tax Duties Applicable VAT Import Taxes
Amendments to the principles with regard to the Transformation and surrounding reform are mentioned in the amended Provisional Regulations on VAT – announced These amended Implementation Rules are aimed to be released by the end of this year. The Chinese government is determined to withstand the turbulence of the current global financial market while sustaining the economic growth. Changes to the VAT system (e.g. the recent rounds of increase in export VAT refund rates and the forthcoming Transformation) have been adopted as an integral part of its plan to meet the objectives The forecast on the budgetary impact due to the Transformation would amount to RMB120 billion. The magnitude of the changes is reported to be the most significant change on a single type of tax throughout the Chinese tax reform history so far. It is apparent that the Chinese government now uses VAT regime to play an increasingly important strategic role in the adjustment of the Chinese economy, rather than merely a tax raising tool. New VAT Reform Implication
This upcoming VAT reform is just a first step and the amendments to the Turnover Tax regulations are the next. There should be more massive and critical adjustments to VAT, and the other two Turnover Tax systems in future. According to statistics released by the Ministry of Finance, revenue from VAT accounts for approximately 31% of China’s overall tax revenue. The Ministry of Finance estimates that VAT revenue to be collected under the revised VAT Regulations will be reduced by more than 120,000,000,000 Yuan – approximately 17 billion U.S. Dollars. In the long term, VAT reform will eliminate double taxation, which was a major drawback associated with the production-based VAT model. Continued