In sight of BT/VAT Pilot: Pros and Cons for Cultural Enterprises
Posted by admin on April 11, 2012 under Hwuason News | 
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After the Shanghai BT/VAT Pilot was launched, 70% of cultural enterprises have shrunk their taxation burden, while others increased. On one hand, the primary goal of pilot is to eliminate double taxation; one the other hand, taxation rate would increase to 6% in the cultural enterprises after the pilot due to a variety of reasons in cost structure, operation circle and etc. Some enterprises have a small share of income deductable tax base, so it is inevitably that these enterprises will have an increased tax burden.
According to the Caishui [2011] No.111 circular, cultural enterprises refer to design, trademark contracting, IP service, advertising, and exhibition service, with a pool of 30,000 enterprises in the pilot, taking a quarter as a whole. Beijing is also planning on its pilot program, given the concurrent taxation trend. Cultural enterprises in Beijing have surpassed real estate and sales industries, becoming the second economic pillar in Beijing. Therefore, cultural enterprises should keep close with the updates in BT/VAT pilot programs.
Pilot with Distinctive Taxation
To avoid double taxation, Shanghai delivered a management provision on VAT distinctive taxation: BT taxpayers should calculate their business income with the deductable accounts among cultural enterprises. Circular 111 keeps these benefits, and the taxpayers should deduct payments paid to other taxpayers outside the pilot coverage for their sales amount.
For instance, advertising taxpayers should deduct their income with payment made to other media partners for taxation base. After the BT/VAT pilot, advertising taxpayers should deduct value-add service fees based on their income and take a 3% VAT rate. This would relatively reduce their taxation burden.
Transitional Financial Support
To smooth the transitional period for cultural enterprise pilots, Shanghai issued Hucaishui [2012] No.5 and No. 6 to provide financial support for taxation increased enterprises.
In Circular 5, tax authority defined the support subjects as taxation increasing pilots. Circular 6 imply specific application requirements in terms of taxation change and calculation method. More detailed instructions will be issued in April in terms of documentation and other reviewing requirements.
Registration procedures for VAT credit policy
After BT/VAT reform, Shanghai has issued Circular 110 and Circular 111 to adjust VAT credit policy. For transportation and modern service industries, Shanghai designed specific VAT credit registration plan. Besides, Beijing has also been preparing settlement policy in terms of tax credit, distinctive collection, and taxation management. 13 articles have been more or less related with cultural enterprises.
VAT related risks
Business tax is relatively simple compared with VAT calculation i.e. the deduction model. For pilots, BT/VAT will bring a dramatic change in their tax calculation. Most cultural enterprises are small-medium companies with accounting systems that are relatively less professional in terms of tax calculation and auditing. Enterprises should improve their accounting personnel’s competence in order to prevent tax risks.
The VAT pilot requires cultural and creative enterprises to regulate their VAT invoice management. First, classify general and small scaled taxpayers. Second, specify special and general invoice in terms of their usage. Third, clarify the amount limit and application period. Less regulated invoice management will bring risks for taxation inspection, which may cause economic crime.
BT/VAT reform is an important tax reform for the twelfth “five year plan”. It is an important structural reform for the tax system in China. A national pullover is in sight that cultural enterprises should pay close attention with the pilots program in Shanghai, especially in distinctive tax collection, financial support, and taxation credit register and settlement policies.
