Value Added Tax

Introduction

China’s tax laws and regulations are in a state of flux. China has had for many years, a dual system of indirect taxes, these being Value Added Tax (VAT) applicable to the goods sector and Business Tax (BT) for the services sector. China’s indirect tax system has however recently transformed into a single VAT system applying to both goods and services. The VAT reforms commenced with a pilot program in Shanghai on 1 January 2012. They have progressively rolled out across all cities and provinces in mainland China and expanded to include many additional service sectors.

The purpose of this brochure is to provide a general introduction to China’s VAT regime along with an overview of the different types of services that Dezan Shira can provide to its clients in relation to the VAT regime.

China’s VAT regime: A short summary

Overview
Broadly, the sales or importation of goods, the provision of services, and the sales of intangible and immovable properties are subject to VAT.

The applicable VAT rate for ‘general’ VAT payers ranges from 0% to 17%, depending on the specific circumstance/applicable industry. The rate for ‘small-scale’ VAT payers is 3%. A company will usually be regarded as a ‘general’ VAT taxpayer if their annual taxable sales exceed RMB500,000 (applicable to manufacturers), RMB800,000 (wholesalers or retailers) or RMB5 million (applicable to VAT reform taxpayers).

Calculating VAT payable
A taxpayer’s VAT liability can generally be calculated as follows:

VAT PAYABLE = *OUTPUT VAT less **INPUT VAT

*OUTPUT VAT = SALES x VAT RATE
(When selling goods or providing a taxable service, the taxpayer should calculate the amount of output VAT and charge this to the buyer/service recipient).

**INPUT VAT = SALES x VAT RATE
(Input VAT is the VAT amount paid by the taxpayer when purchasing goods or taxable services).

Please note that for general VAT payers, input VAT can be credited/offset against output VAT. However, a small-scale VAT taxpayer is not able to deduct input VAT to reduce their VAT payable amount/liability.

A company must be a general VAT taxpayer in order to be able to issue a ‘fapiao’. This is an official receipt/document which is a requirement for conducting business with many Chinese companies/suppliers/customers etc.

The specific tax payment deadline for a taxpayer is assessed by the authorized tax authorities according to the taxpayer’s amount of VAT tax payable. A taxpayer who is unable to make payments according to a fixed deadline may opt to pay tax for each transaction.

Please note that there are also specific VAT rules in respect to the import and export of goods and services.

How can Dezan Shira & Associates help?

Dezan Shira’s tax team has the depth and breadth of experience across all main industry sectors, as well as the ability to apply best practices to ensure the management of indirect taxes is handled effectively.

Our indirect tax specialists can assist you with:


    Training
  • Workshops/boot camps/internal training to ensure your company’s key management and personnel have a broad understanding of the VAT regime.

    Advisory
  • Financial impact assessments to determine the impact of VAT on your businesses profitability and to assess any risk areas.
  • Contract reviews to maximise VAT efficiency.
  • Advising on transactions such as restructuring and mergers and acquisitions.
  • Guidance with issuing and receiving fapiaos/receipts.
  • Application for VAT exemptions, zero rating for exported services.
  • Engagement with the tax authorities on all levels to assist in resolving any contentious issues.
  • Support in relation to tax audits or other investigations.

    Compliance
  • Preparation of VAT returns.
  • Perform high level reviews of VAT returns.

The abovementioned services are intended to highlight the range of services we currently provide our clients. We would be pleased to have a conversation with you to hear about your particular needs and requirements. From there, we can prepare a precise scope of work and fee proposal taking these into account.

Why Dezan Shira & Associates?

Dezan Shira’s tax practice specifically focuses on providing advice to foreign companies in relation to their investments and business activities in China. Dezan Shira has a dedicated PRC tax team which is highly experienced and specialised in all areas of PRC tax, including VAT. Our tax professionals have a strong working relationship with the China tax authorities on all levels and are able to assist you with multiple aspects associated with your company’s VAT affairs.

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