1. What is the Value-Added Tax (VAT)?
If you are European or Japanese citizen, you will most likely be used to the so-called value-added tax (VAT). It’s a popular way of implementing a consumption tax in countries and differs from sales tax in a significant way, that the VAT takes full tax on all sales, but posteriorly refunds the tax difference to the sellers.
2. Sales Tax & VAT : What differences?
A VAT is similar to a sales tax in which ultimately only the end consumer is taxed. While the sales tax is collected and remitted to the government only once (when the end consumer purchases a product), the VAT works differently. Collections, remittances to the government and credits for taxes that are already paid occur each time a business in the supply chain purchase a product.
3. VAT: Pros & Cons
The main disadvantage of the VAT system is that businesses collecting VAT have less profits overall than businesses collecting sales tax. The advantage is that all sellers collect tax and pay it to the government. The taxpayer has an incentive to collect the tax.
4. China VAT reform: what’s new?
VAT was implemented in China in 1984 and is administered by the State Administration of Taxation. The standard rate of VAT in China used to be 17%. The reduced rate of 13% applied to products such as books
After operating a dual system of indirect taxes, China has recently implemented its VAT reform on May 1st, 2016. Posterior to the tax coming into effect, the policy affected the service sectors of: finance and insurance, consumer services, construction and real estate. This step puts China on a level of international practices; as many of the OECD countries have already implemented a full VAT system.
5. China’s VAT reform: what consequences?
By changing the business tax to the VAT system, burdens on all industries will be reduced in order to revitalize the real economy. The Chinese Government stated that the main goal of the entire tax reform is to “transform the nation from a production-based economy into a more service-oriented economy”.
With the reform from May, the VAT has essentially taken the place of the business tax in all the manufacturing and service sectors. This step is expected to halve taxes this year.
6. A quick analysis sector by sector
7. To what extent will the new VAT impact business in China?
Due to the fact, that the reform was just announced in May, it is still too early to make assumptions whether the new VAT system will bring real advantages to businesses. Furthermore it also remains to be seen if the reform will have the expected results on China’s economy. As the reform was originally intended to boost the service sector, which makes up more than half of the Chinese economy, expectations are big and if the new VAT system boosts the sector, China’s economic transition would make a huge step forward.
8. Does VAT have a social effect?
Besides the expected success for the economy, the new VAT reform also has a significant social impact, as it eases tax burdens for small-and medium-sized enterprises. This on the other hand could encourage entrepreneurship and lead to new jobs.
9. What are advantages of the VAT for multinational companies?
Furthermore many multinational companies have already taken advantages from the new rules. For instance, so called cross border services (services between 2 companies from different countries, transfer pricing arrangements, back office support services and management services), had to pay the former 5% business tax. With the new system, exports of services might be exempt from VAT, which makes a remarkable difference in terms of costs.
Tax Law of the People’s Republic of China