Future Trends Indicated by Amendment on Tax Administration Law (Draft)

Posted by on July 11, 2013 under China Tax | Be the First to Comment

The socio-economic conditions and tax practices have taken great changes since Tax Administration Law was amended in 2001. In order to keep up with the latest developments in practice, Legislative Affairs Office of the State Council released Amendment on Tax Administration Law (Draft) (http://www.chinalaw.gov.cn/article/cazjgg/201306/20130600387820.shtml) to seek public opinions in late June.
The Amendment focused on adjustments on certain legal terms to coincide with other laws, and it also strengthened the tax authorities’ power to collect tax information and clarified certain procedural issues. Such amendments were in line with current tax administration demands and they also reflected future trends on tax administration to some extent.
Trend 1 Strengthen on Tax Administration
The amendment expanded the inquiry scope of tax authorities stipulated in the current tax administration law article 17 “the accounts of taxpayer” to “the accounts, transactions, cash flow, etc”. And it also added an article requiring government sectors providing tax information to tax authorities. Such amendment effectively solved the problem of information asymmetry between taxpayers and tax authorities and would play an important role in combating tax violations.
Seen from past experience, many significant special tax adjustment cases with respect to equity transfer that tax authorities dealt with had close links with information concerning shareholder changes provided by relevant business registration authorities. With information channel widening, we predicted that tax authorities would strengthen the tax enforcement and strictly dealing with tax violations. Therefore, Hwuason Lawyers suggest companies note about the tax administration trend and enhance the tax compliance in order to avoid potential tax risks.
Trend 2 Expand the Discretion of Tax Authorities
The amendment revised the range of tax preservation stipulated in the current tax administration law article 38 “tax authorities have grounds for deeming that a taxpayer engaged in production or business operations has evaded taxes” to “tax authorities have grounds for deeming that a taxpayer has possibilities to fail to fulfill tax obligation”. There was no doubt that such revision would result in unlimited discretion of tax authorities in reality, since tax authorities may depend on their own understanding to do such judgments. However, to any act conducted by taxpayer, tax authorities may think that the taxpayer has the possibilities to fail to fulfill tax obligation, and the only differences may lie in their degree. Therefore, tax authorities may abuse this article to advance the time of taxpayers’ liability at their own will, which is definitely unfavorable to the taxpayers.
Meanwhile, it may easily lead to legal uncertainties and inconsistencies, that is, under the same circumstances, some tax authorities think taxpayers have possibilities to fail to fulfill tax obligation, while other tax authorities do not think so.
Trend 3 Possible Monopoly Position of Certified Tax Agents
The amendment revised the current tax administration law article 89 “A taxpayer or withholding agent may appoint a tax agent to handle its tax matters on its behalf” to “A taxpayer or withholding agent has the right to appoint a certified tax agent to handle its tax matters on its behalf”. Since the concept of tax agent may include certified tax agent, lawyer and certified public accountant, such revision actually granted certified tax agent the privilege of rendering tax services. In fact, certified tax agent, lawyer and certified public accountant respectively hold certain portion in tax service market and their services have their own emphasis. However, the amendment only recognized the legal status of certified tax agent, and excluded lawyer and certified public accountant from the tax service market, which may result in the monopoly position of certified tax agent, lower the quality of tax services, and have negative influences on the development of tax service market.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Energy Service Company: Taking VAT Exemptions or Making a Waiver

Posted by on December 19, 2012 under China Tax, Tax Incentives | Be the First to Comment

 Started at Shanghai in January 2012, further spread to other eight provinces in August, China is now experiencing a significant VAT tax reform. And it is alleged that the scope of the reform will be expanded to include other industries like construction industry next year. Therefore, companies shall take a close eye on the latest update to the tax reform and best prepared for the potential changes.
According to the tax law, income gained by qualified energy service companies performing energy performance contracting is exempted from VAT within the pilot areas.
(1) Eligibility for VAT exemptions
Not all energy service companies are eligible for VAT exemptions. The tax law sets certain standards, namely two requirements. On one hand, the related technologies for the implementation of the energy performance contracting shall meet the standard of GB/T24915-2010. On the other hand, the format and content of the signed contract shall also meet the standard of GB/T24915-2010.
(2) VAT exemptions may not reduce the tax burden
Compared with paying VAT, a company with VAT exemption may not definitely reduce its tax burden. Since a company claims for VAT exemption, it may be not allowed to deduct the tax at the same time.
As an energy service company, its service scope may vary. Some may focus on the energy saving of buildings, for instance, to improve the energy efficiencies of the air-conditioning systems or the heating systems. Others may focus on energy saving of illumination by using the energy effective bulbs. However, generally speaking, their business models are similar which are to provide free energy saving equipment for industries and gain profits from industries’ reduced energy consumption.
From the operation of an energy service company, one can easily figure out that some equipment may be involved during a certain project. So sometimes whether the equipment can be deducted or not may dramatically influence the tax burden of both the energy service company and its client. If the energy service company is willing to abandon the exemption, it can deduct the tax and issue VAT invoices which may actually reduce the total tax burden.
Therefore, Hwuason Lawyers suggest companies aware that VAT exemption may not necessarily lead to a lower tax burden. And we advise companies to estimate the tax burden under these two circumstances before applying for the VAT exemptions.
(3) Abandon of VAT exemptions
A company can choose to pay VAT or apply for exemption at its own will. However, such exemption, once abandoned, cannot be reapplied within the next 36 months. So companies shall be very cautious when dealing with such tax issues. Accordingly, we suggest companies review their business operation for a comparatively long period of time and also take their future plans into consideration in order to make the best decisions. And it is always preferable for a company to seek tax professionals’ advisories when making such important choices.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). Or you can visit our website at www.hwuason.com.

About us

Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

 

THE IMPACT OF VAT REFORM ON CULTURE AND CREATIVITY ENTERPRISES

Posted by on November 29, 2012 under China Tax, Tax Incentives | Be the First to Comment

State Council decided at an executive meeting on 25 July to extend the VAT pilot scheme for transportation and some modern services sectors from Shanghai to 10 provinces (municipalities and cities with independent planning status), including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen,. Meanwhile the types of industries, which are dominant in the services sector in these 10 locations, are culture creativity enterprise. The question is that what changes the VAT reform would bring to culture creativity enterprises.

 The beneficiaries are small and medium sized enterprises
According to Cong Ming, the VAT pilot scheme has produced obvious results in reducing tax burdens in Shanghai since its implementation in 2011. Tax burdens were reduced for 80% of the pilot enterprises. In the case of small-scale taxpayers (companies with annual sales of less than Rmb5 million), in particular, the tax rate was reduced by about 40% from 5% to 3%. Small and medium-sized enterprises have become the biggest beneficiaries of this reform.

 Problems with the application of the credit invoice method
On one hand, value-added tax invoice management to distinguish between for general VAT taxpayer and small-scale VAT taxpayer. Especially for general taxpayers, distinguish the special invoice and commercial invoice two, on the range, tax part have special defined. On the other hand, bill of value added tax limitation and business tax is different, the common limitation of invoice is low. And the large amount of the invoice for longer time will cause inconvenience to conduct business. In our tickets to the rail system control tax, the invoice is not standard will directly bring tax inspections and the verification collection of risks.

 Financial subsidies offered by the government
The tax reform required enterprises to report their monthly tax changes to the office of the State Administration of Taxation. The office will closely monitor and analyze changes and identify which of the enterprises are qualified for the subsidy. At present, financial subsidies have been granted to enterprises suffering tax burdens since the implementation of the tax reform. Cultural creative enterprise should close attention to Shanghai pilot, especially in balance collection processing, financial help, preferential tax for cleaning, financial management and tax law risk prevention four and enterprise of immediate interest, do all aspects of work, so as to achieve the maximum profit, caught in the challenge of opportunity.

The impact of the VAT reform on China’s Creative cultural services

Posted by on September 6, 2012 under China Tax, Tax Incentives | Be the First to Comment

Background

The Ministry of Finance and the State Administration of Taxation accounted that,from 1 August 2012 until the end of the year, the VAT pilot scheme will be implemented in Beijing and seven other provinces and municipalities: Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen. According to theannouncement, Beijing is to be expected to complete the conversion by September 1, 2012. Experts suggest that this reform will not lower tax rates that have been previously paid by large enterprises.

(1) Benefits for small and medium-sized businesses

 Mr Wu, a deputy general manager of Ruosen, said that “Our Company’s taxrevenues have dropped by nearly a third under a VAT reform”.

Ruosen, which is a digital technology limited company in Beijing, is engaged in the IT service business which is subject to 5% BT and 6% VAT under the VAT Pilot Program. At first sight,Ruosen seems to pay more in taxes that it would have in the first place. But it was found that it in fact paid less tax under a VAT reform.

A AVT taxpayer is able to reclaim the VAT he or she paid on purchases, and doing so could reduce payable taxes. According to the state regulation, businesses with turnover of RMB 5 million or more must register as a general VAT tax payer, who will enjoy the right to deduct. A registered person may deduct the VAT charged on work equipment or office supplies which are used for the purposes of his or her taxable business. For example, if Ruosen’s turnover is RMB 12 million last year, the company will pay business taxes of RMB 600,000 at a rate of 5%. Although Ruosen would pay RMB 680,000 in taxes at VAT rate of 6 % under the Pilot Program, the company is entitled to the tax deduction by providing a valid VAT invoice. As a result,Ruosengot about RMB 240,000 of VAT deductions. Accordingly,the amount of VAT the company actually paid was only RMB 440,000.

(2) Not all smooth sailing

After a VAT Pilot Program started in Shanghai this year, Beijing has taken several step to speed up its tax regime. According to Cai Shui [2011]No.111, the VAT reform will be specifically applied in the transport industry and certain “modern service industries” including technology services, information technology services, culture and creativity services as well as logistics auxiliary services. By reference to culture and creativity services, it coves several specific types such as design, transfer of trademark, copyright, intellectual property related, IP agent, advertisement, and conference and exhibition.

“In order to help develop the Chinese animation industry, a lower 3% business rates had already been applied to animation products involving picture, word, music, technical production,ect. We initially worried that such an existing preferential tax policies would no longer be available after a VAT pilot reform was to be implemented .But there is no need to worry too much about this issue right now as the adjustment on tax policy will continue to support the animation industry. In other words, less tax and taxation of both VAT and business tax will be made hereby.” Ms Sun said

Some doubts that tax preferential policy mentioned above can not relieve the stress on animation enterprises. Even if ananimation company could be able to save as much as RMB 200,000 per year by paying for reduced tax rates, it has been questioned that how helpful it wouldbe for animation enterprises to enjoy lower tax rates

Responding to above criticism, Wu Zhen pointed out that “the tax reductions effected by means of the VAT should help smaller firms in the Chinese services sector that have been greatly affected recently by increased costs and restricted credit.” Meanwhile, Wu Zhen suggests that the government should give more details about the new tax policy and put it into practice as soon as possible.

(3) Reality check

Shifting from business tax to VAT has lessened most tax payers’ burden in cultural enterprises. However, Liu Tianyong said that the VAT tax reform does not exactly mean that this will be full tax cuts for cultural enterprises. In fact, large sized enterprises will possibly even pay more than it had previously, while the average tax burden of small scale taxpayers was slashed .

In addition,the pilot program might enable a customer of a Pilot Industry taxpayer to credit input VAT incurred on the purchase of services or goods. But the service company such as creative and cultural businesses cannot deduct the tax cost of the purchase of materials. This puts the service company in a disadvantageous tax position, as part of its expenses are double-taxed.

Moreover,as the pilot currently limited to one city, for larger companies and businesses, they may have a difficult management issue because they are paying one sort of taxes in one city and another set of taxes in other cities. Unfortunately, this may eventually result in a higher tax bill. For example, if a customer is a BT taxpayer outside the Pilot Program who cannot deduct input VAT, its tax burden may increase if it receives services provided by taxpayers in the Pilot Program.

Although all experiments come with problems, Liu Tianyong believes that such a move will boost China’s taxation system reform.

Reference:http://www.ce.cn/culture/gd/201208/03/t20120803_23551092.shtml

The general distinction between additional deduction of RD expense and accounting RD expense

Posted by on January 4, 2012 under China Tax, High Tech Enterprises | Be the First to Comment

The general distinction between additional deduction of RD expense and accounting RD expense

 

There are two conceptions for RD expense, one is additional deduction RD expense, and the other is accounting RD expense.

I. The accounting RD expense

1personnel

Enterprises’ RD staffs’ salary, bonus, subsidy, social security, housing fund and such expense, and external RD staffs’ labor cost.

2direct input

Material, fuel, and power expenses consumed by RD activities; molds, technological equipment exploration and production cost used by intermediate tests and trial production; equipment adjustment and test cost, samples and sampling machines purchasing fees, and the test expenses of trial productions.

3depreciation and amortization

The depreciation or leasing fees of instrument, equipment, housing and such fixed assets, and relevant operation maintenance and repairing expenses of fixed assets.

4design fees

The design fees of new production, the new process regulation fees, and technology books material fees, material translation fees directly related with RD activities.

5amortization of intangible assets

The amortization expenses of software, patent rights, non-patent technology and such intangible assets.

6other expenses

Demonstration, review, check, evaluation of developed achievements, application fee, registration fee, and agency fee of intellectual property rights; other expenses directly related with RD activities, such as technology books material fees, translation fees, conference fees, business trip fees, office expense, training fees, consultation fees and so on.

II. Additional deduction RD expense

1personnel

The salary, bonus, subsidy and allowance of enterprises’ staffs engaged in RD activities.

2indirect input

Material, fuel, and power expenses consumed by RD activities; field test fee of exploring technology; molds, technological equipment exploration and production cost used by intermediate tests and trial production.

3depreciation and amortization

The depreciation or leasing fees of RD instruments and equipments

4design fees

The design fees of new production, the new process regulation fees, and technology books material fees, material translation fees directly related with RD activities.

5amortization of intangible assets

The amortization expenses of software, patent rights, non-patent technology and such intangible assets specially used for RD activities.

6other expenses

Developed achievements’ demonstration fees, review fees and check fees.

All in all, the key distinction between additional deduction RD expense and accounting RD expense lies in “grant”, merely granted additional deduction RD expense is fit with tax policies. Hence, accounting staffs should enhance the communication with RD department, grasp the content and stage of RD projects, and make clear distinction between different RD expense conception to enjoy relevant tax incentives policies sufficiently.