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Taxing Times
 
     
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In November 2011, the Chinese government implemented a significant reform of the VAT system in the transportation and modern service industries. The Ministry of Finance and State Administration of Taxation jointly issued Financial and Tax Document(s) [2011] No. 110 and No. 111, which specified the pilot proposal’s implementation measures for Shanghai’s change from business tax to VAT.

Policy Impact
Implemented on 1 January, 2012, the pilot proposal is only applicable for Shanghai’s transportation and modern service industries. However, due to these sectors’ wide reach, this move will impact at a number of different levels, including service providers and receivers. Some institutions will benefit while others will lose out; reforms will bring about challenges as well as opportunities.
In the future, enterprises purchasing services from pilot enterprises can offset input tax amounts from their output tax amount. Since the pilot proposal may reduce the burden of commodity turnover tax, pilot enterprises will see more competitive advantages.

Potential Business Opportunities
The pilot proposal will impact on value chain arrangement and business organisation enterprise setup, and branches may be shifted into or out of Shanghai. Therefore, enterprises included in the pilot proposal may consider postponing the purchase of fixed assets so as to offset input tax arising from the post-reform purchase of fixed assets. Enterprises may also postpone purchasing labour services until after the reform is launched to avoid paying business tax that cannot be offset; this especially applies to labour services provided by affiliated parties.
Enterprises outside the pilot proposal should carefully study suppliers and price differences, comparing the advantages in paying the higher VAT – which can be offset – or paying a lower rate business tax – which cannot.

Working with Suppliers
The specific criteria for taxpayer status will cause many enterprises to choose between 1) applying for determination as a VAT general taxpayer or 2) maintaining status as a VAT small-scale taxpayer so as to pay the levy method of three per cent.
However, implementation time is short; enterprises should immediately consider such VAT issues. Companies should ensure that their main suppliers have been registered as a general taxpayer and are capable of providing the special VAT invoice.

Suggestions for Action
Shanghai’s pilot enterprises should take immediate action in order to move in line with these new regulations. Carefully research the two documents and their attachments as soon as possible, and focus on the special provisions for the appropriate industry. Companies should also review existing Chinese customer groups and service contracts, and consider whether they should adjust or formulate new service pricing strategies and methods.
As per the pilot proposal requirements, pilot enterprises need to make significant adjustments in their internal financial, accounting and taxation systems to better adapt to the new VAT system. Organisations should carefully review the effectiveness of Chinese subsidiaries’ overall taxation functions.

In addition, enterprises outside Shanghai and non-pilot enterprises in Shanghai should still pay attention to indirect impacts. Companies should review the value chain system, especially the transferability of service supply functions, and consider the feasibility of shifting Chinese businesses to Shanghai. Furthermore, organisations should consult with pilot enterprises regarding pricing tactics and special invoices

This column is sponsored by CLP consulting

CPL Consulting provided auditing services for CBBC China for the financial year 2010-2011. For more information, contact Queena Ye at Queena.ye@cplchina.biz, +86 (10) 6591 6000 ext. 602, www.cplchina.biz

 

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