China: Further Progress on VAT Reform
In 2008, China began to reform indirect taxes to alter the bias between production and service industries keen to further develop services and break the economy’s historic dependence on production. VAT is not a new concept in China and has historically sat alongside Business Tax, but previously it has been applied only to the supply of goods and the provision of repair, processing and replacement services (Business Tax applies to the supply of services). This system led to double taxation and was in desperate need of reform to replace Business Tax and apply VAT to both the supply of goods and services. Also, the system would bring China in line with the indirect tax practices of other countries.
To date, the reform has been driven by a number of separate projects which have focused on particular cities, such as Shanghai, and specific industries. In a recent announcement, China’s Premier Li Keqiang stated that the final phase of the VAT reform would commence on May 1. At this date, property developers, construction, financial and consumer service businesses will also be covered by the VAT requirements, which would mean all sectors of business would then be covered by the requirements.
The Ministry of Finance and the State Administration of Taxation (SAT) have issued a joint communication on the implementation of the final phase called "Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax" (aka Circular 36). Circular 36 sets out several sub sectors which determines the rate of VAT applicable ranging from 6 to 17%, where 6% is applicable to the transfer of intangibles, and 11% applicable to the transfer of real property.
There is no doubt that the new VAT requirements will require a great deal of additional administration for both government agencies and local businesses alike and for the latter preparatory work needs to be undertaken to assess whether VAT needs to be applied to local services and at what rate.