China Deepens VAT Reform to Combat Financial Complexity

August 25, 2017

China Briefing

China announced plans to deepen its value-added-tax (VAT) reform again on August 18 this year at a State Council executive meeting chaired by Premier Li Keqiang. The government’s newest move sets out to enhance the non-standardized tax rate structure, simplify the tax compliance system, and push forward VAT legislation.

China’s VAT reform has been a continuous development that resolved to replace Business Tax (BT) with VAT, reduce corporate tax burdens, and increase the weight of the service sector in China’s economy. China first piloted the VAT reform in Shanghai in 2012, and later expanded it to other municipalities and various industries.

Starting from May 1, 2016, construction, real estate, financial, and consumer services sectors also switched to the VAT regime, marking that VAT officially replaced BT as the only indirect tax in China. Henceforth, China’s tax system aligns more closely with the international standard. According to the Ministry of Finance, from May 2016 until June this year, China has relieved tax burdens of mainland businesses by RMB 850 billion, equivalent to US$127.5 billion.

The last phase of reform started on July 1 this year. China’s State Administration of Tax decided to decrease the four-tier tax system to three tiers, removing the 13 percent bracket and leaving the 17 percent, 11 percent, and six percent brackets. The change reduced tax rates for agricultural products, tap water, publications, and a number of other goods from 13 percent to 11 percent.

Timeline of VAT reform in China

In the meeting last week, the government pledged to improve the tax compliance system in order to provide taxpayers with more efficient and convenient tax services. More specifically, the reform will encompass increasing digitization of the tax system, simplifying procedures of tax filing, promoting the use of electronic invoices in place of the physical fapiao, and improving tax services.

The meeting touched on other issues that will be put on the schedule. Companies can anticipate tax policies for the manufacturing, finance, and construction sectors being improved and legislation on the VAT rolling out. The government will also tackle the problem that a small number of taxpayers face a higher tax burden due to insufficient tax offsetting items.

China’s business environment is known for its complicated tax and accounting systemthat leads to financial complexity. Foreign businesses that first enter the Chinese market usually find it difficult to comply with various regulations. Take China’s VAT invoice system as an example: businesses in China need to document all transactions on a fapiao, a legal receipt that monitors payment and prevents individuals and businesses from evading tax. Companies need to apply for a fapiao quota and purchase fapiao from the tax bureau. An increase in the quota requires companies to go through another lengthy application process.

As the government expresses interest to enhance multiple aspects of tax services and incorporate digital technology into the tax system, companies should expect the accounting procedures to become easier to navigate in the near future.

Despite progress made so far, China’s VAT reform is not fully-fledged and will further unfold in the future. Companies should build a tax structure around the reform and navigate the financial complexity under the reformed tax system.

Tags: china, financial complexity, taxation, vat reform
Posted in Asia, Wealth Management, Wealth Management