VAT Pilot Program: Expanded to Nationwide on August 1st 2013

Posted by on May 21, 2013 under Corporate Tax Planning | Be the First to Comment

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 [2011] No. 111 and Caishui [2012] 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 [2011] No. 111 and Caishui [2012] 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 [2012] 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 [1997] 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 [2012] No.50 and Announcement [2012] 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 (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.

VAT Reform: a Technology Consulting Company Reduces Tax by 40% in a Contract

Posted by on February 19, 2013 under Corporate Tax Planning | Be the First to Comment


VAT reform, spread largely at the latter part of last year, has brought significant tax benefits to most pilot companies, especially small and medium sized companies. As for small-scale taxpayers in Tianjin, they paid 2336.26 RMB tax on average at the first phase and their tax burden decreased by over 20%, reported by People’s Daily.
A technology consulting company, founded by several graduates a few years ago, focuses its business on technical consulting services. Prior to VAT reform, it paid business tax at the tax rate of 5%. However, it only needs to pay a 3% VAT as a small-scale taxpayer after VAT reform. Meanwhile it can deduct its input VAT and can be deducted as output VAT by its downstream companies, which reduces their overall tax burden substantially. For instance, it signed a technical consulting amount to 40,000 RMB. Previously it needed to pay 2000 RMB business tax and now it only needed to pay 1200 RMB VAT, which meant the tax burden of the company declined up to 40%.
1. Keep up with the latest trends in tax
Many pilot companies enjoy the tax benefits brought by VAT reform, just like the above mentioned technology consulting company. In fact, the reform means a lot to these pilot companies and their business. With the declining of the expenses, the sales price of the products or services may decrease correspondingly. And more potential clients are willing to purchase their products or services, which is quite important to the survival and growth of companies.
The tax system in China is extremely dynamic. And hundreds of regulations with respect to taxes are promulgated by State Administration of Taxation and General Administration of Customs every year. On one hand, the constant changing regulations may cause great trouble for companies to comply with. However, on the other hand, companies may also seek opportunities to gain tax benefits through these changes. And hwuason lawyers suggest company keep up with the latest trends and benefit from these changes in taxes.
2. Make full use of the current tax policies
VAT reform is a significant tax reform and involves numerous companies from various industries. It took quite a long period of time to discuss, to research and gradually formulate the final draft. And it will also last long to fully complete the whole reform nationwide. Compared with VAT reform, many regulations seem to be more focused on certain issues and their formulation processes are relatively simple. Some of these regulations contain only two or three articles. Since these regulations are also effective, hwuason lawyers suggest company pay special attention to them and try to get better tax statues by fully exploiting current tax policies.

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.

In sight of BT/VAT Pilot: Pros and Cons for Cultural Enterprises

Posted by on April 11, 2012 under Latest Regulations | Be the First to Comment

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.

Liu Tianyong Interviewed by the Beijing News on IIT Issues of Annual Bonuses

Posted by on December 22, 2011 under Hwuason News | Be the First to Comment

Is the annual bonus the more the better? Obviously not. The edge area exists in tax law cause a curious circumstance that if you got one more yuan, the tax rate changed and you have to pay one thousand more tax. This edge area has come to the stage a long time ago, but since the new IIT Law amended, the edge area had moved to somewhere else. A Weibo posted by Ge Changyin saying that annual bonus of 18001 will be levied 1154.1 yuan more than 18000, which aroused wide disputes on internet.
Tax on Annual Bonus
Annual bonuses obtained by a taxpayer shall be considered as the income from his one month’s wages and salaries for calculation of tax payable. Calculating methods are dividing the annual bonuses obtained by the employee in the very month by 12 months, and determining the applicable tax rate and the sum of quick calculation deduction according to the quotient. If, in the month when the year-end one-off bonuses are distributed, an employee’s income from wages and salaries obtained in the very month is lower than the amount for expense deduction as prescribed in tax laws, the balance after deducting “the margin between the employee’s income from wages and salaries obtained in the very month and the amount for expense deduction” from the annual bonuses shall be used to determine the tax rate applicable to the annual bonuses and the quick calculation deduction.
In other words, if an employee’s income from wages and salaries obtained in the very month is higher than or equals to the amount for expense deduction as prescribed in the tax laws, the applicable formula should be: Amount of tax payable = The employee’s annual bonuses obtained in the very month × applicable tax rate – sum of quick calculation deduction;
Or: Amount of tax payable = (the employee’s annual bonuses obtained in the very month – the margin between the employee’s income from wages and salaries obtained in the very month and the amount for expense deduction) × applicable tax rate – quick calculation deduction
Expert Advice:
Liu Tianyong from Hwuason Law Firm said that to increase the net income of employees, the company shall balance the distribution between the salary and the annual bonus. The principle is to reduce the distribution of the part with higher rates. The reporter found that, take an annual income of 120,000 yuan for instance, if the monthly salary is 5000 and the annual bonus is 60,000, the tax amount would be 6435; but if the monthly salary is 6000, and the annual bonus is 3180, net income will increase 3255 yuan.

See: http://finance.sina.com.cn/money/lcfa/20111208/023010954183.shtml

Notice of SAT on Value-added Tax Issues Concerning Assets Restructure of Taxpayers

Posted by on April 28, 2011 under Corporate Tax Planning, Latest Regulations, Transactional Taxes | Be the First to Comment

Notice No. 13, 2011

 According to stipulation of the Interim Regulations of Value-added Tax of People’s Republic of China and its detailed implementation rules, issues of value-added tax concerning assets restructuring of the taxpayers are notified as follows:

During process of the assets restructuring, by form of merge, split, selling and replacement, taxpayers transfer whole or part of the substantial assets and related financial claim, debt and labor force at the same time to other organizations and individuals, do not belong to taxation scope of value-added tax, concerned goods transfer shall not be collected for value-added tax.

This Notice shall be enforced from March 1st, 2011. Matters not yet coped with shall be managed according to regulations of This Notice. Reply of SAT on VAT Shall not be levied upon Transfer of Whole Enterprise Property, Guoshuihan No. 420, 2002; Reply of SAT on VAT Policies Concerning Assets Restructure of Taxpayers, Guoshuihan No. 585, 2009; and Circular of SAT on VAT Issues Concerning Whole Enterprise Property Transfer of China Direct Broadcast Satellite Co., Ltd, Guoshuihan No. 420, 2002, shall be abolished simultaneously.