In early April this year, the State Council announced that the VAT pilot program will be expanded nationwide on August 1st 2013 in order to eliminate the differences on the tax systems between pilot areas and non-pilot areas and to further implement the structural tax reduction policy. Since Shanghai became the first pilot area on January 1st 2012, the VAT pilot program has already expanded to major cities and provinces in late 2012, such as Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang and Hubei. It is alleged that the VAT pilot program went smoothly in general and achieved desired outcomes. However, many problems still remains during this process, such as the increasing tax burden, the transition issues, etc.
Based on our expertise and experience accumulated in taxation, Hwuason Lawyers summarized the common problems met by pilot areas and offered brief analysis for your easy reference.
1. Aware of the Scope of Taxable Services
According to Caishui  No. 111 and Caishui  No. 71, the taxable services in pilot areas shall include land transport services, water transportation services, air transport services, pipeline transportation services, research and development (R&D) and technical services, information technology services, cultural creative services, logistics support services, tangible personal property leasing services, and assurance and consulting services. As for services like financial and insurance services, construction and installation services are not included at present.
Owing to the complexity of economic activities, to precisely define whether a certain economic activity is a taxable service is not easy. For example, purification engineering design and construction services, the purification engineering design services belongs to design services and are within the scope of taxable services; but the purification engineering construction services belong to construction and installation services and are beyond the scope of taxable services.
2. Choice of Status of the Taxpayer
VAT taxpayers are divided into general taxpayers and small-scale taxpayers, which differ significantly with respect to methods for calculating tax payable, invoices, etc. The general taxpayer shall apply the general method for calculating tax payable and the tax payable shall be the balance of output tax for the current period subtracted by the input tax for current the period. The small-scale taxpayer shall apply the simplified method for calculating tax payable and the tax payable shall be the sales amount multiplied by the rate of levy. And it is not allowed to claim any input tax credits.
We find that more and more companies tend to do business with general taxpayers. Besides, since the small-scale taxpayer is not allowed to claim any input tax credits, the actual tax burden of a general taxpayer may not be higher that a small-scale taxpayer under the same circumstance provided with sufficient input tax credits. Therefore, eligible small-scale taxpayers may apply for general taxpayer status depending on their needs. Meanwhile, taxpayers shall pay special attentions on authenticity and legitimacy of certain transactions when filing VAT invoices. It is strictly forbidden to false filling out special VAT invoices otherwise the taxpayer may face severe legal consequences. In addition, taxpayers shall also exam the authenticity and legitimacy of VAT invoices when receiving such invoices so as to avoid economic losses due to deny of input tax credits.
3. Transition of the Two Tax Systems
Both Caishui  No. 111 and Caishui  No. 71 define clearly about the effective date of pilot program. Generally speaking, tax liabilities are closely related to taxable activities. Therefore, taxpayers are subject to VAT if they render taxable services after the starting date of pilot program, otherwise they are subject to business tax. With regard to an uncompleted lease contract signed before the starting date of pilot program, the taxpayer shall continue to pay the business tax before the expiration of the contract. In cases that taxpayers provided activities prior to the starting date of the pilot and such services are terminated or a discount is made on the services or there is any error in the invoices, but the invoices are disqualified for becoming invalid, the taxpayer shall issue red-letter ordinary invoices instead of red-letter special invoices; if the taxpayer needs to re-issue invoices, it shall issue ordinary invoices instead of special invoices. In cases that taxpayers provided activities prior to the starting date of the pilot and the turnover of such services is refunded, the taxpayer shall apply for the refund of the paid business tax. Therefore, Hwuason Lawyers suggest taxpayers concern about the tax treatment in case of discount, refund, etc. and transit from old tax system to new tax system smoothly.
4. Aware of the Treatment of Special Tax Issues
At the early stage of the pilot, it caused great dispute in respect to the cultural undertaking construction fee issue. Later on, Ministry of Finance and State Administration of Taxation jointly issued Notice on Issues Relating to the Collection of Cultural Undertaking Construction Fee in the Pilot Reform of Replacing Business Tax with Value-added Tax (Caizong  No. 68). The Notice clearly stated that entities and individuals providing advertising services who are originally obliged to pay cultural undertaking construction fee according to Caishuizi  No. 95, and entities and individuals providing advertising services at the pilot regions who are established after the pilot reform is launched in such regions, shall pay cultural undertaking construction fee after they are included in the scope of the VAT Reform. In addition, State Administration of Taxation issued another two announcements, namely Announcement  No.50 and Announcement  No.51, to further clarify certain issues regarding the collection of cultural undertaking construction fee.
State Administration of Taxation often timely issues notices in responding to controversial tax issues in practice. Therefore, taxpayers shall keep informed about the latest tax policies issued by SAT, especially tax policies explaining tax treatment of certain tax issues, to ensure the compliance of tax policies and avoid potential tax risks.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (email@example.com) or Lingyan Hu (firstname.lastname@example.org). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
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