Home » Business » Biz Commentary
New value-added tax pleases, perplexes businesses
By Robert Smith |
April 12, 2012, Thursday
|
Print Edition
Print Edition
THE launch of the Shanghai VAT (value-added tax) Pilot Project in 2012 was heralded by the Shanghai Party Secretary, Yu Zhengsheng, as "one of the most important tax developments in China's history."
The timeline surrounding the project was quite compressed, with the first announcement coming in late October 2011 and implementation starting only two months later. The pilot resulted in both companies and the tax authority rushing to urgently clarify and understand the treatment for many different transactional and technical issues. With three months already gone by, it is time to reflect back on the pilot and also look to the future of VAT in China.
It has been a very exciting time in the China VAT world since January. Busy for both the relevant authorities and also for affected companies.
The authorities spent significant efforts to prepare in advance. Studies were performed to analyze the fiscal impact, new VAT return forms were prepared, comprehensive training sessions were conducted and certain technical issues have been clarified, though issues, such as the exempt, or zero-rated, treatment of services provided to overseas companies, still remain to be fully implemented. But those issues are currently being addressed.
Affected companies struggled to grasp the impact of the changes and are now starting to encounter practical and daily challenges related to VAT invoicing, return preparation and other pilot-related matters. These companies should have filed two months of VAT returns already - for January and February - under this new tax regime. Their experiences have ranged from generally smooth to a complete mess.
Varied results
Under the new VAT pilot project, there are firms and industries that are benefiting with lower tax levels. Others are starting to realize that their tax burden may actually increase. General VAT taxpayers who used to incur business tax costs imbedded in or charged on the purchase of "in-scope" services seem to enjoy the most benefit.
Small-scale VAT taxpayers also have benefited from a lower rate. The companies possibly incurring higher tax costs, such as leasing, have been supported with rules seeking to limit the amount of increased costs. However, there are still some industries, like transportation, with an increase of up to 11 percent, where the tax burden depends on many facets of complex business transactions.
Companies undergoing the most significant operational changes, those transitioning from a pure business tax to VAT - such as transportation, consulting and advertising - are experiencing the most growing pains as they struggle with the overall financial impact.
The VAT project was implemented on a limited basis first in Shanghai in order to study the outcomes prior to a larger roll-out. However, implementing a fundamental change to the tax rules in one single location can create its own challenges related to treatment of cross-border transactions occurring even inside China's own borders.
Many businesses have multitudes of legal entities spread around China and supply chains that are increasingly connected nowadays. Still, according to an Ernst & Young survey of over 550 VAT professionals in China, 85 percent of respondents agreed that rolling out the changes on a pilot basis was appropriate to gauge the impact and help companies prepare in stages.
A number of cities have submitted applications to be included in the next round of VAT locations. Beijing, Jiangsu Province, Guangdong Province, Chongqing, Tianjin, among others, are rumored to be in different stages of preparation and study. Other services or industries are also being considered for inclusion.
So there may be even greater coverage of the types of services and geographic locations even within 2012. It is entirely possible that the expansion of the pilot project to a growing list of locations and additional "in-scope" services may accelerate a nation-wide roll-out.
The business tax and VAT accounted for over 50 percent of the entire amount of tax revenue collected by the Chinese government in 2011.
With the transformation of such a large revenue base, it is reasonable to wonder how the changes will impact tax collection. It would not be surprising to see studies analyzing whether the movement of services from the business tax to VAT should reduce rates. There are already numerous VAT rates, and introducing more will make compliance even more difficult.
Staying ahead
Nevertheless, China's general VAT rate of 17 percent remains the highest among Asia-Pacific tax jurisdictions but is still low in comparison to European rates. Market observers noted the world is undergoing a fundamental shift towards consumption-based taxes and the trend for rates has been upward.
The upcoming months and years will be exciting and challenging for VAT in China. It directly impacts the costs and cashflow of an organization to a level that surprises many executives. Companies need to stay ahead of regulatory changes and adapt accordingly - or risk being left behind, incurring too much in indirect tax costs or accumulating compliance risks.
Proceed with caution as the next round of VAT pilot expansion may be on your doorstep sooner than you think.
Robert Smith is Asia Pacific Indirect Tax Leader at Ernst & Young.
The timeline surrounding the project was quite compressed, with the first announcement coming in late October 2011 and implementation starting only two months later. The pilot resulted in both companies and the tax authority rushing to urgently clarify and understand the treatment for many different transactional and technical issues. With three months already gone by, it is time to reflect back on the pilot and also look to the future of VAT in China.
It has been a very exciting time in the China VAT world since January. Busy for both the relevant authorities and also for affected companies.
The authorities spent significant efforts to prepare in advance. Studies were performed to analyze the fiscal impact, new VAT return forms were prepared, comprehensive training sessions were conducted and certain technical issues have been clarified, though issues, such as the exempt, or zero-rated, treatment of services provided to overseas companies, still remain to be fully implemented. But those issues are currently being addressed.
Affected companies struggled to grasp the impact of the changes and are now starting to encounter practical and daily challenges related to VAT invoicing, return preparation and other pilot-related matters. These companies should have filed two months of VAT returns already - for January and February - under this new tax regime. Their experiences have ranged from generally smooth to a complete mess.
Varied results
Under the new VAT pilot project, there are firms and industries that are benefiting with lower tax levels. Others are starting to realize that their tax burden may actually increase. General VAT taxpayers who used to incur business tax costs imbedded in or charged on the purchase of "in-scope" services seem to enjoy the most benefit.
Small-scale VAT taxpayers also have benefited from a lower rate. The companies possibly incurring higher tax costs, such as leasing, have been supported with rules seeking to limit the amount of increased costs. However, there are still some industries, like transportation, with an increase of up to 11 percent, where the tax burden depends on many facets of complex business transactions.
Companies undergoing the most significant operational changes, those transitioning from a pure business tax to VAT - such as transportation, consulting and advertising - are experiencing the most growing pains as they struggle with the overall financial impact.
The VAT project was implemented on a limited basis first in Shanghai in order to study the outcomes prior to a larger roll-out. However, implementing a fundamental change to the tax rules in one single location can create its own challenges related to treatment of cross-border transactions occurring even inside China's own borders.
Many businesses have multitudes of legal entities spread around China and supply chains that are increasingly connected nowadays. Still, according to an Ernst & Young survey of over 550 VAT professionals in China, 85 percent of respondents agreed that rolling out the changes on a pilot basis was appropriate to gauge the impact and help companies prepare in stages.
A number of cities have submitted applications to be included in the next round of VAT locations. Beijing, Jiangsu Province, Guangdong Province, Chongqing, Tianjin, among others, are rumored to be in different stages of preparation and study. Other services or industries are also being considered for inclusion.
So there may be even greater coverage of the types of services and geographic locations even within 2012. It is entirely possible that the expansion of the pilot project to a growing list of locations and additional "in-scope" services may accelerate a nation-wide roll-out.
The business tax and VAT accounted for over 50 percent of the entire amount of tax revenue collected by the Chinese government in 2011.
With the transformation of such a large revenue base, it is reasonable to wonder how the changes will impact tax collection. It would not be surprising to see studies analyzing whether the movement of services from the business tax to VAT should reduce rates. There are already numerous VAT rates, and introducing more will make compliance even more difficult.
Staying ahead
Nevertheless, China's general VAT rate of 17 percent remains the highest among Asia-Pacific tax jurisdictions but is still low in comparison to European rates. Market observers noted the world is undergoing a fundamental shift towards consumption-based taxes and the trend for rates has been upward.
The upcoming months and years will be exciting and challenging for VAT in China. It directly impacts the costs and cashflow of an organization to a level that surprises many executives. Companies need to stay ahead of regulatory changes and adapt accordingly - or risk being left behind, incurring too much in indirect tax costs or accumulating compliance risks.
Proceed with caution as the next round of VAT pilot expansion may be on your doorstep sooner than you think.
Robert Smith is Asia Pacific Indirect Tax Leader at Ernst & Young.
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