China to Replace Business Tax with Value Added Tax in All Sectors
At the opening ceremony of the National People’s Congress (NPC) held on 5 March 2016, Premier Li Keqiang announced that effective from 1 May 2016, Value Added Tax (“VAT”) will replace the current Business Tax (“BT”) in all sectors, including real estate & construction, financial services & insurance, lifestyle and other services (including hospitality, food & beverage, healthcare and entertainment).
We forecast the expected VAT rates below:
|Sector||Expected VAT Rate||Current BT Rate|
|Financial Services & Insurance||6%||5%|
|Lifestyle & Other Services||6%||Generally 5%, though certain entertainment services are subject to rates ranging from 3–20%|
This marks an era when BT will be replaced by VAT in all sectors and the consequent total tax savings for all businesses are expected to reach RMB900 billion (approximately 0.4% of GDP). However, this may impact different sectors to different extents.
The expected 11% VAT rate for the real estate & construction sectors (compared with the current BT rate of 5% and 3% respectively) is expected to influence the property market’s pricing strategy and profitability of projects.
In contrast, the expected 6% VAT for the financial sector may not result in a material tax burden increase. This is because financial institutions would be able to benefit from input VAT credits and unlikely need to pass on the tax costs to customers. The same can be said for the insurance sector.
With the VAT replacing BT, the food and beverage (F&B) sector would no longer face a situation where organisations have to either pay a VAT or BT depending on whether their predominant business is the sale of takeaway products or a catering / restaurant service. However, businesses would instead be subject to a 17% VAT rate (for sale of food products) or a 6% VAT rate (for restaurant meals), which may have a significant tax cost impact on enterprises in the sector.
Although detailed implementation rules have yet to be released, companies in the respective sectors should start to prepare now for implementation of the expected VAT rates on 1 May 2016. They should also prepare for the potential financial impact of this change and the consequent pricing decisions.
We will share more insights when the VAT implementation rules are released.
New Tax Filing Method for Veterinary Drugs Trading Enterprises
On 4 February 2016, the State Administration of Taxation (SAT) released the SAT Announcement  No.8 that would take effect from 1 April 2016 for general VAT taxpayers engaged in the veterinary drugs trading business. The announcement states a Simple Tax Filing Method may be adopted for calculating and paying VAT based on the sales volume of the veterinary biological products and the tax rate is 3%.
This presents veterinary drugs trading enterprises with the option to choose a more cost-efficient tax filing method. However, taxpayers should consider the Simple Tax Filing Method option carefully as it cannot be changed within 36 months of its adoption. Proper tax planning is essential to figure out whether the Simple Tax Filing Method is more beneficial for the business.
Announcement of Service Innovation Pilot Programmes
On 14 February 2016, China’s State Council announced its plan to conduct pilot programmes for the innovative development of services in 10 cities and 5 new zones under direct control of the central government (“state-level zones”) over the next 2 years. The 10 cities are Tianjin, Shanghai, Hainan, Shenzhen, Hangzhou, Wuhan, Guangzhou, Chengdu, Suzhou and Weihai, while the 5 new state-level zones are Harbin, Jiangbei (in Nanjing), Liangjiang (in Chongqing), Gui’an (in Guizhou) and Xixian (in Shaanxi).
One of the programmes involves the extension of preferential tax policies to advanced technological service enterprises (ATSEs) within the pilot areas. The scope of enterprises entitled to the 15% Corporate Income Tax (CIT) rate (reduced from the standard 25% rate) will be expanded beyond service outsourcing enterprises to include other high-tech and high value added service sectors as well. These enterprises are also allowed to use the 8% (of total employee expenses) deduction threshold for employee education expenses (under the CIT law, deductions for these expenses are generally limited to 2.5% of total employee expenses).
Apart from preferential tax policies, the government also offers other financial and administrative support such as financial subsidies for enterprises providing research and development (R&D), energy-saving, environmental protection and environmental services, which are urgently needed by China. Hence, service or trade enterprises that qualify for such government support should take advantage of it from financial and cost-efficiency perspectives.
New Provisions for Online Publishing Services
The State Administration of Press, Publication, Radio, Film and Television (“SAPPRFT”) and the Ministry of Industry and Information Technology (“MIIT”) jointly announced Provisions for the Administration of Online Publishing Services (the “Provisions”), which have taken effect since 10 March 2016.
The Provisions state that Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises are prohibited from engaging in online publishing services, and prior approval from SAPPRFT is required for any relevant cooperative projects in China that involve such enterprises.
New Shanghai Tax Filing System Requires More Detailed Expatriate Information
Shanghai’s tax filing system has been comprehensively upgraded since February this year. The new system requires a more detailed disclosure of foreign expatriates’ income and allowance deduction, which must be recorded in the tax system when the company does the monthly individual income tax filing.
The “Individual Income Tax Law of the People’s Republic of China” and the “Notice of the Ministry of Finance and State Administration of Taxation Concerning the Implementation of Individual Income Tax Policies” (Cai Shui Zi (1997) No. 20) define the scope of deductible allowances for foreign expatriates’ PRC individual income tax purpose. They include allowances for housing, meals and laundry, relocation, home leave airfare, Chinese language training and children’s education. For such allowances to be deductible, valid invoices and relevant supporting documents must be submitted to the tax authorities.
With the new system in place, the allowance details will be more readily available to the tax authorities, increasing the chances of challenges to applications for allowance deduction during tax filing. In light of this, foreign expatriates working in China are advised to take the following actions:
- For expatriates already working in China: re-assess your allowance position and make necessary adjustments if the position appears aggressive
- For expatriates about to start work in China: plan the compensation package so that a reasonable allowance arrangement can be made from your first day of work there
SBA Stone Forest (SBASF) is a corporate advisory and public accounting group that focuses on serving foreign enterprises in China since 2001. Headquartered in Shanghai with offices in Beijing, Suzhou, Shenzhen, Chengdu and Hangzhou, we help help foreign investors set up in China smoothly, and thereafter support them in navigating China’s regulatory and business environment.
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