Why VAT reform can save your company money
March 30, 2012 | BY
clpstaff &clp articles &Reform to China's VAT system began in Shanghai earlier this year. Companies can now offset VAT from services used in Shanghai, relieving their tax burden
"After the economic crisis the Chinese government wanted to change the dynamics of the economy and modernise certain industries,” said Lawrence Hu, a tax attorney at MWE China Law Offices in Shanghai. Hu also noted that the move is part of the government's plan to transform China from a manufacturing centre to a country boasting modern services like finance and consulting.
In order to avoid being a factory for the world, it was necessary for the government to consider value added tax (VAT), as it develops service industries and companies can offset the VAT for these services. The law implementing the pilot scheme consisted of multiple joint circulars issued by the Ministry of Finance and the State Administration of Taxation. The pilot scheme began on January 1 of this year in Shanghai and only applies to transport and certain service sectors. So far, the programme has been carried out successfully, according to Hu. Training by the authorities has helped to ensure a smooth implementing process.
Before the pilot scheme, China worked on a double taxation system – business tax and VAT. The new system has a single VAT covering both the goods and services sectors. The replacement of business tax with VAT means while the tax is collected by a business, the end consumer effectively pays it.
Hu has handled multiple cases assessing the impact of the VAT pilot programme. His advice to companies is to engage more service providers from Shanghai. For example, companies using a law firm in Shanghai will receive a VAT invoice upon payment, which is tax deductable for the company and ultimately reduces their tax payable for the year.
Since the launch of the pilot scheme in Shanghai, Beijing will also implement a similar system on July 1, with rumours that Guangzhou, Qingdao, and Tianjin are also considering taking part. “Other cities are quickly looking to implement the VAT scheme, because VAT invoices can be used to offset a company's tax burden,” said Hu.
Despite the pilot scheme being well received, the government is cautious of implementing these policies too quickly. Shanghai and Beijing are being used as testing grounds. This has created a window of opportunity for consumers using services in Shanghai. The overall plan is to implement VAT nationwide, until then companies can enjoy favourable tax opportunities in China's most populous city.
By David Tring
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