At the start of this year, companies in some service sectors began paying value-added taxes (VAT) in Shanghai instead of a business tax levied on total revenue. China was expected to expand the Shanghai reform to other 8 locations. Beijing may take the lead in the expansion of VAT pilot program on Sep. 1, 2012.
On Sep 3, 2012, Liu tianyong, as a managing partner and senior partner of hwuason law firm, and Shi Zhengwen, as a professor at China University of Political Science and Law, accepted the interview.During the interview, Liu Tianyong expressed his opinion on the coming Beijing VAT reform.
-The rules implemented in Shanghai are likely to be applied in Beijing, but there might be small adjustments. And some sectors may suffer from an increased tax burden.
-The pilot program rules are more likely to continue to provide concession or exemption under VAT. So, companies may apply for financial aids to help reduce the tax burden.
-In terms of taxpayers’ rights, Liu tianyong put forward that the future tax reform should increase protection of taxpayers’rights.
Click here to see the attached video: http://tv.hexun.com/2012-09-05/145497087.html
Recently, lawyer Liu Tianyong was interviewed by Fangyuan lvzheng magazine, talking about the lawyer tax.
Taxation on lawyers is a complex problem in China. For example, there is a great difference between Beijing and Tianjin in tax provisions. Hwuason lawyer Liu Tianyong said: Since January this year, the law firms’ business tax has changed to the VAT scheme in Shanghai. Additionally, the tax rate has increased from 5% to 6%.It seems that Beijing will adopt this pilot reform as well. However, although 1 percent isn’t a small number, few lawyers object to this change. Liu thinks that Chinese lawyers have to afford a tax rate about 9% to 15%. It is no less than the rate of real estate tax which is so-called windfall profits in the industry. Thus, lawyer’s taxation burden is too heavy. As a result, being the boss of a partnership firm, the partners will undertake the high risk of unlimited liability while getting low income because of the heavy tax burden.
At last, Mr. Liu Tianyong said: the legal profession ought to learn how to design a reasonable tax structure. Lawyers must improve their cost consciousness to save tax. Though it may be painful, it’s of great importance.
On 22th, Mar, 2012, Mr. Liu Tianyong was invited to attend the forum in reference to business tax and the VAT. In fact, the VAT reform firstly started in Shanghai on 1st, Jan, 2012. From 1st, Jul 2012, Beijing will carry out the plan as well. Hwuason lawyers participated in the design and survey of the scheme at the beginning of the preparations. At the forum, Mr. Liu Tianyong made a speech for one hour from four aspects: the background of the reform, an analysis of Shanghai pilot, an introduction of the reform at Beijing, and some advices of Hwuason lawyers. At the end of the speech, Mr. Liu communicated with leaders and replied some hot issues.
“The increasing of taxation revenue is surpassing GDP in the recent years. In general, administrative litigations on taxation are less than 1% of the administrative cases nationwide. China’s taxation is in front of overwhelming reforming pressure”, Liu Tianyong (JSD), founding and managing partner of Hwuason Law Firm was interviewed by the CEN reporter on Feb 24th.
Almost fifteen-year’s taxation experience, Mr. Liu posed a concluding remark that “though the taxation rate is decreasing all the time, our national taxation revenue is actually increasing.”
Controversy 1: Reasonable Tax Avoidance: Right or Wrong
According to the statistics released by Ministry of Finance on Feb 14th, the total national taxation revenue in 2011 is almost 9 thousand billion Yuan, with an increase of 1.7 thousand billion to 2012. Compared with the 9.2% GDP rate, the taxation increasing rate is 22.6%.
“Regardless of the inflation and administrative control, high nominal taxation rate is the fundamental cause of this.”Liu said.
In general, taxation amount is 20% of total GDP in developed countries, while in China it’s 30% or more.
In Liu’s opinion, taxation rate is more than a mere number. It is a symbol of our taxation system. It is also the indirect incentive for enterprises to reasonably avoid tax.
“The basic principles of tax reform are simplifying the taxation procedure, expanding tax base, lowering taxation rate, and restricting administration. Reasonably avoid taxation is ungrounded by law and contrary to reform. The right thing to do is legitimately paying the tax and enjoying specialized tax benefits.” Liu said in the interview.
Take Business Tax for instance, you have to pay the tax when you loss, if there is any cash flow in your account. This 3% to 5% BT rate is not deductable.
“This may limit the enterprise’s daily operation.” Liu remarked.
However, it is good to see a BT/VAT reform is piloted in Shanghai and nationwide. Beijing will soon be included in the league after a city-wide taxpayer surveying. This pilot reform may presumably lessen 47 to 70 billion Yuan.
Controversy 2 Enterprise sue the big bro: bliss or curse
“Commoners do not fight with governors” is a common sense in China. It is also a creed for doing business in China.
Things are different elsewhere: in China Taiwan, there are almost 5000 taxation litigation cases every year, taking more than 50% share of the administrative litigations. In mainland China, there are only 2000 more or less. In the United States, there are usually 200 thousand similar cases in a year.
“Administrative litigation and review is an appropriate and important outlet for law and economics relief in a major economy,” Liu said, “however, such cases are not always the priorities for enterprises on their taxation issues. Some of my clients will ask why should I take the pain to sure the government after I pay the bill?” Other than paying the evaded tax, enterprises are also restricted to tax penalty on tax evasion. “For enterprise, paying the bill is a sign of good attitude to the compromising authority,” Liu added, “litigation should be the routine gateway for solving such matters. Case law and tax reform are both important in professionalized legal field such as taxation. ”
Controversy 3 Administrate Discretion: Yes or No
In China, nominal taxation rate has way up higher than the realistic taxation rate. It is the major cause of local discretion.
Liu told the CEN reporter, “In order to introduce investment, local governments are eager to exchange tax credits with enterprise resources. Some Fund and Trust companies are advocating and lobbying in these places to dip a share. ”
“It’ll be bliss, if nothing wrong happens,” Liu commented, “the government will strike a backfire on tax avoidance once the enterprise goes down.”
In the case of Hongyuan Tech Company in Jiangxi, the enterprise was charged with tax evasion in a government conference briefing. Hongyuan Tech filed an administrative litigation compliant in order to achieve a settlement with Nanchang government. The intermediate people’s court of Nanchang did not register the case in the reason that the conference briefing on the settlement of LCOS program of Hongyuan Tech is not a specific administrative action but a procedural action.
The superficial massage is the lost of accountability of local government and the magnification of discretion among the local tax authority. In a word, we need a comprehensive tax legislation to imply future tax reform.
For now, China does not have a specific legal system for taxation. The Law of Tax Collection has substituted a basic law of taxation. At the same time, many regulatory provisions and policies are posted every now and then, which has entitled a great potential of discretion in taxation practice.
“Reform in taxation law and policy is highly demanded for further economic and social development in China.” Liu concluded.
After the VAT reform pilot implemented in Shanghai, Beijing, Shenzhen, Jiangsu, Tianjin, Chongqing have applied for VAT reform pilot as well. Beijing will start the pilot on July 1st.
The managing partner of Hwuason Mr. Liutianyong told the journalist that the reform was accelerated for two or three years. VAT reform is just a small step among Chinese financial and tax system reform.
19 kinds of taxes and other administrative expenses
According to China tax laws and regulations, there are 19 kinds of basis taxes, such as VAT, consumption tax, business tax, EIT, IIT, and such. In enterprises’ operation, an enterprise could face all those taxes in some specific circumstances. Besides, there are so many administrative expenses burden taken by enterprises, especially in local areas.
SMEs tax burden is heavy
SMEs face so many taxes and administrative expenses, therefore, tax incentives seem so crucial for SMEs and corporate operation. If tax incentives are implemented ineffectively, the whole industry will be hindered.
In tax practice, no matter to enterprises or populaces, tax reduction is imperative. The 12th five year is very important for development model transition and structural adjustment, and structural tax reduce should be the theme of the 12th five year for better and faster development.