Doing business in China? Determine how China’s reduced VAT (Value Added Tax) rates will impact your operations
Southfield, Mich. — Clayton & McKervey, an international certified public accounting and business advisory firm located in metro Detroit, continues to monitor the Value Added Tax (VAT) rates in China due to the country’s recent tax reform impacting Chinese companies as well as those doing business in China. In May, the Value Added Tax (VAT) rates in China were lowered—expecting to save businesses 240 billion yuan in this calendar year alone; in addition, the criteria for businesses to be taxed as small-scale VAT taxpayers were broadened.
“The goal of VAT reform is to stimulate economic growth, innovation, and entrepreneurship by lessening the tax burden on businesses,” said Nina Wang, CPA and manager of the firm’s international tax practice. “The prior system—in which two taxes co-existed, a VAT applying to only goods and a Business Tax (BT) applying to only services—disproportionately taxed services and discouraged the development of the services sector.”
VAT reform, which removed all Business Taxes and replaced them with the Value Added Taxes, was initially piloted in Shanghai in 2012 and expanded through mainland China in May 2016. The VAT now applies to all of the service industries as well—including construction, real estate, hospitality, health care, lifestyle, and financial and consumer service—which had been previously been taxed using the BT classification.
In the latest update, effective May 1, 2018, VAT rates were lowered. Taxpayers who were in the 17 percent and 11 percent VAT tax brackets are now taxed at 16 percent and 10 percent, respectively. In addition, for companies that sell products from China to other countries, the export VAT refund rate has decreased from 16 percent to 10 percent in accordance with the reduction in VAT rates. Taxpayers at the 6 percent tax bracket remain unchanged at 6 percent.
“VAT reform appears to be successful because the service sector is growing at a higher rate than any other part of China’s economy,” Wang said. From its start in May 2016 through June 2017, taxes paid by businesses were decreased by approximately 850 billion yuan. However, Wang cautioned the question of long-term economic growth has yet to be answered.
There has also been reform in small-scale VAT taxpayer requirements, Wang said. Previously, there were three distinct tiers of small-scale VAT taxpayers, based on the amount of sales in each industry. The manufacturing sector was eligible if annual sales were less than RMB 500,000. The threshold was RMB 800,000 and RMB five million for the trading sector and service sector, respectively.
The three tiers have since been consolidated into one category, defined as those with sales less than RMB 5 million for any 12-month period. General VAT taxpayers who meet this requirement are able to register as small-scale VAT taxpayers before December 31, 2018.
“More taxpayers will have the option to be classified as small-scale taxpayers,” Wang said, “and as a result, they will enjoy a VAT levy rate of three percent, which is calculated based on sales with no deduction for input VAT. In special instances, like in the sales/lease of real estate or providing labor dispatch service, the VAT levy rate is 5 percent.”
“As the Chinese government transitions toward a more service-oriented economy, time will tell if China’s VAT reform will have lasting impact,” Wang said. “In the meantime, Chinese companies and those doing business in China should consult with their tax advisors to determine how these VAT updates may impact their operations.”
About Clayton & McKervey
Clayton & McKervey is a full-service certified public accounting and business advisory firm helping closely held businesses compete in the global marketplace. The firm is headquartered in metro Detroit and services clients throughout the world. To learn more, visit claytonmckervey.com.