At a meeting on July 25 of China’s State Council hosted by Premier Wen Jiabao, it was decided to expand the value-added tax (VAT) pilot scheme to cover ten cities and provinces including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong and Xiamen.
The pilot scheme imposes VAT, rather than business tax, on transport and selected service industries. The move is part of a plan to amalgamate all forms of China’s turnover taxes into VAT over the long-term. VAT was previously only imposed on manufacturing companies.
The imposition of VATis expected to reduce the tax burden on the service sector, as business tax is calculated on a firm’s gross revenues, rather than only on added value. It also avoids double taxation issues in that sector, whereby some products have been subject to VAT after manufacture, and then business tax when sold.
As forwarded by the official statement, the policy analysis can be divided into four parts according to the hwuason law group:
1.The background of tax reform
4.How the tax reform could affect domestic enterprises in the future
By reference to (4),in order to help domestic enterprises better understand the new tax policy,the hwuason law group will provide advice by focusing on:
-Improvement in facial system
-Value Added Tax invoice management and risk prevention
-Financial support policy. applications
-Tax preferential policies
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  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  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.
In the first half of this year, the government issued series of regulatory measures on the real estate industry, and the price of real estate started to fall. Obviously, the government will issue more measures in the future. Currently, besides the first tier cites, the second tier cities starts to response as well.
Recently, Haikou local tax bureau issued Opinion on land value increment tax liquidation, and Jiangsu local tax bureau issued Notice on enhancing collection and management of land value increment tax (Sudishuifa  No 53).
Haikou Opinion stipulates the concept of expense, the deduction demands and such in detail and the summary is as follows:
i. Expense (except development indirect cost) listed in the project development cost with national tax invoice, should get matched fabrication invoice, and mark in category in the report notes. Otherwise, it will be deemed as duplicate project cost.
ii. Expense listed in the project development cost could not be confirmed merely by “project content” of invoice. The opposite party should get relevant qualification as demand. Otherwise, the expense will not be confirmed.
iii. In preliminary project fees-three connections and one leveling expense, three connections refer to three connections project outside planning, three connections project within planning belong to project measures fee according to construction contract, and should be assumed by contractor.
iv. The planning construct expense in preliminary project fees refers to the whole planning construct expense of project, excludes the expense of single project; the same is the design expense in preliminary project fees.
While, the NO 53 notice of Jiangsu emphasized on the development expense accounting management:
i. Local tax bureau should formulate “the real estate exploitation expense reference standard” according to the construction and installation project cost index issued by construction and installation project cost management departments, quota standard and guide price in construction material market.
ii. To excessively high expense, tax authorities could demand tax payers to provide the final audit report or settlement audit report of projects. To excessively high expense without due reason, tax authorities should deduct the expense according to “the real estate exploitation expense reference standard”, and transfer it to tax inspect departments if serious.
Seen from these two documents, the tax authorities will pay more attention to the rationality of expense and the conformity of vouchers during land value increment tax liquidation. Both format and substance should be qualified, and the format seems more important.
I. Companies determined as high and new technology enterprises per the Administrative Measures and the Working Guidelines in 2008 shall proceed with the qualification reexamination work of 2011.
II. The reexamination work of high-tech qualification shall follow the rule of autonomous, the effective period of high-tech qualification will be 3 years upon approval of the reexamination; the qualification of enterprisers not attending the reexamination or fail to pass will be invalid at the expiration date.
III. The reexamination work of 2011 will be dealt with centrally, enterprises will attend the reexamination shall submit reexamination materials before July 20.
IV. Reexamination requirements, procedure and organization shall follow relevant contents of the Administrative Measures and the Working Guidelines.
V. Intermediary organization recorded at the Beijing High-tech determination working group (see Notice of Publicizing Lists of Intermediary Organizations Participating in the Beijing High-tech Enterprise Determination Work of 2011 by Beijing Municipal Science and Technology Commission, Beijing Finance Bureau, Beijing State Bureau of Taxation, and Beijing Local Bureau of Taxation) may participate in the Beijing high-tech enterprise determination work of 2011 and launch special audit of the R&D activity costs and high-tech incomes during latest 3 accounting years.
VI. Enterprises shall submit paper materials in 5 copies after online application process at the Site of Management Work for the Determination of Hi-tech Enterprises (www.innocom.gov.cn) to the municipal science commission where registered or the park administration commissions of Zhongguancun Demonstration District and above organs shall re-submit the materials to Beijing High-tech determination working group office (follow as “determination office”. When submitting materials the company shall also provide the Prepaid Monthly /quarterly EIT Filing Form (copy). The company registered in the demonstration district shall also provide the Register Certificate of Zhongguancun National Independent Innovation Demonstration District of the Company (see Notice on Issues Concerning Further Implementing National Tax Policies Supporting the Zhongguancun National Independent Innovation Demonstration District by Beijing Municipal Science and Technology Commission, Beijing Finance Bureau, Beijing State Bureau of Taxation, and Beijing Local Bureau of Taxation, jingcaishui No. 2948, 2010, Annex 5).
VII. If the company name changed before the reexamination work and do not bring up renaming application, can apply for renaming with the reexamination according to Notice on Issues Concerning Renaming and Reviewing High-tech Enterprises, the company shall submit renaming and reexamination materials using the original name.
Caishui No. 47, 2011
According to relevant stipulations of Enterprise Tax Law of People’s Republic of China and its Implementation Regulations, and Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Foreign Income Tax Credit of Enterprises, caishui No. 125, 2009, applicable tax rate and tax deduction issues of high and new technology enterprises (high-tech enterprises) are further clarified as follows:
I. For high-tech enterprises applied and determined under standards of total research and development fee, total incomes, total sale amount, high-tech product (service) incomes, etc. relating to both overseas and domestic business and production activity, the overseas incomes can subject to high-tech tax preferences of the 15% low rate of EIT, calculation of deduction limit may follow the total amount of both overseas and domestic incomes upon 15% rate.
II. Other Issues of overseas income deduction of said high-tech enterprises shall still follow the contents of Caishui No.125, 2009.
III. High-tech enterprises in THIS NOTICE refer to companies with the high-tech enterprise certification and enjoying the Reduced CIT rate of 15% approved by determination organization according to The Administrative Measures for Assessment of New/High Tech Enterprises, Guokefahuo No.172, 2008, and Working Guidelines for the Administration of Assessment of New/High Tech Enterprises, Guokefahuo No.362, 2008, under the Enterprise Tax Law of People’s Republic of China and its Implementation Regulations.