From business tax to value-added tax: The transition is complete in China

As of May 1, China completed the transformation from business tax (BT) to value-added tax (VAT) (the “B2V Reform”). The B2V Reform aims to reduce the tax burden to taxpayers in China, including established enterprises of foreign entities, such as a wholly foreign owned entity.

For many years, China has operated a dual indirect tax system. VAT was applicable to the sale and importation of goods, typically at 17 percent, while BT was applicable to most services at a rate of 3 percent to 20 percent. BT was generally considered an inefficient sales tax as it effectively taxed each stage of a supply chain, regardless of the profit or value added by businesses within the supply chain.

The B2V Reform was first introduced in Shanghai on January 1, 2012 and was implemented in stages, industry by industry. In general, small scale taxpayers pay 3 percent for VAT, but tax rates for general taxpayers vary from industry to industry:

• Services — 6 percent is for general service provisions, and 11 percent applies to transportation and communication.
• Tangible goods — The standard rate is 17 percent. 11 percent applies to real estate services, and 13 percent applies to utilities, books, and newspapers.

Eliminating the dual indirect tax system aimed to reduce the tax burden for all industries, which is the main contributor to the estimated increase in China’s deficit of RMB 560 billion in 2016. However, the tax impact on individual business should be assessed on a long-term basis. For many, the cost of investing in major fixed assets may decrease by up to 17 percent.  Traditional manufacturing, wholesale, and retail businesses will be able to claim VAT credits when they purchase services and reduce cost by 5 percent compared to paying BT before the B2V reform. For others, there’s a possible tax increase in the initial stage.  And for some companies in the final stage of a VAT chain, the tax burden could increase.

Companies doing business in China are strongly recommended to analyze closely the impact of the tax reform on their cash flows, review tax-related contract clauses, implement enhancement of VAT risk control and accounting system changes, and seek to understand how to comply with the changes in the VAT regime.

Our Global Services consulting team is available to assist you. Please contact us if you have any questions or concerns.