B2V Reform (II) - Financial service sector has been included in the VAT chain
On March 24, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) issued Caishui  36, ("Circular 36") on the Comprehensive Roll-out of the B2V Transformation Pilot Program, under which the financial service industry will be transformed from Business Tax (BT) to Value Added Tax (VAT) ("B2V Reform") starting from 1 May 2016 ("expansion date"). The key points of the B2V Reform for financial service include: the financial service sector will be subject to the general VAT method with a tax rate of 6%; the "Financing Sale and Leaseback Model" will be reclassified from "Tangible Movable Property Leasing Services" to "Financial Services"; input VAT on lending services received by the borrower (interest cost) cannot be creditable; the taxable sales amount of each trading transaction of financial product will be the balance of the sales price less the purchase cost; the previous BT preferential policies for the financial service sector will be largely retained; certain specific cross-border financial services provided by pilot taxpayer will be entitled to the export VAT exemption treatment.
Pilot taxpayers should be familiar with Circular 36 and understand the various administrative provisions. They should also pay close attention to the subsequent follow-up measures, analyse the impact and react accordingly.
We introduced the overall objective, layout and directions of the B2V Reform in our News Flash entitled "B2V Expansion Measures Released - VAT is now completed for all industries" published on 24 March 2016. In this Issue, we will provide our observations and views on some practical issues faced by the financial service industry during the initial stage of this final round of B2V Reform.
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