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Please click on the links below to view more:   Value Added Tax ("VAT") reform expanded to Central Region    The Ministry of Finance and the State Administration of Taxation ("SAT") on 11 May 2007 jointly issued Circular Cai Shui [2007] No.75 entitled "Provisional Measures for Expanding the Scope of Input VAT Claim in the Central Region" ("Circular 75").  This follows the State's decision to expand the trial run of this important part of VAT reform from the North-east Region to the Central Region.   Read more...... Expand / Collapse Background    China's current "production based" VAT system refrains general VAT taxpayers from claiming credit of input VAT incurred in fixed assets.  Such input VAT has to be capitalized as part of the fixed asset costs and charged to income statement through depreciation.  Such policy is believed to have added extra tax burden to investors and discouraged them to make fixed asset investment and upgrade their production with more advanced technology.  This has been one of the key focuses of the VAT reform in recent years.    From 1 July 2004, the State decided to launch a trial run of "consumption based" VAT system in the North-east Region (namely Heilongjiang, Jilin and Liaoning Provinces and the City of Dalian) as a means to stimulate the investment and economy of that Region.  From then onward, general VAT taxpayers engaged in the 8 specified industries in that Region have been allowed to claim input VAT incurred on fixed assets subject to certain limits.  The State planned to apply this new system, with modification if necessary, to the entire country once the trial run was completed.    New development under Circular 75    With the experience of implementing this new system in the North-east Region, the State has decided to expand it to the Central Region.    As indicated in Circular 75, starting from 1 July 2007, general VAT taxpayers engaged in the following 8 industries as their main business (i.e. over 50% of annual turnover) within the 26 specified industrial cities of 6 provinces (i.e. Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan) will be allowed to claim credit of input VAT incurred on fixed assets subject to certain limits: Equipment manufacturing Petrochemical Metallurgical Automobile manufacturing Agricultural products processing Electrical power Excavating High/new tech The tax and accounting treatments relevant to this VAT system under Circular 75 are similar to those currently applied in the North-east Region.  Nevertheless, Circular 75 provides slightly different coverage to be applied in the Central Region: Applicable industries - two new industries, i.e. excavating and electrical power, are added to the scope for the Central Region under Circular 75. And two industries, i.e. shipbuilding and military equipment and materials, currently applicable to the North-east Region are not covered in the Central Region;   Applicable locations - for the North-east Region, all general VAT taxpayers in the specified industries are entitled to apply the "consumption base" VAT system as long as they are located within the aforementioned three provinces and one city.  However, for the Central Region, taxpayers have to be located within the specified 26 cities in order to qualify for the new system. Meanwhile, it is expected that the SAT would establish detailed rules for the implementation of Circular 75.    PwC observation    This new system will apply to both domestic and foreign invested enterprises (general VAT taxpayers) in the Central Region.  This is apparently welcomed by these taxpayers.  Circular 75 does not reveal when this new system will be expanded to other localities of China.  It is possible that the progress may be slowed down probably because the State may not wish to over-fuel the heated economy with this "tax-friendly" policy until the economic situation warrants it.   Close Beijing released detailed measures of Land Value Appreciation Tax ("LVAT") for property developers    Following the issuance of Circular Guo Shui Fa [2006] No.187 ("Circular 187") by the SAT which aims at tightening up the LVAT administration of property developers, the Beijing Local Tax Bureau ("BLTB") recently released two local tax circulars Jing Di Shui Di [2007] No.134 ("Circular 134") and Jing Di Shui Di [2007] No.138 ("Circular 138") to provide for detailed administrative measures for the reconciliation of LVAT by property developers in Beijing. [Highlight of Circular 187 (Jan 2007, Issue 2)] Circular 134 provides for detailed standards, criteria and procedural requirements during each stage of LVAT reconciliation. In particular, it also requires a property developer taxpayer to submit an LVAT verification report issued by an independent agent when it performs the LVAT reconciliation exercise.  Below outlines a few crucial points of Circular 134 of which property developers should be aware:   Read more...... Expand / Collapse Deemed development costs   On some criteria and issues, Circular 187 has deferred to the discretion of the provincial tax authorities, including Beijing which is a directly-administered municipality. The above two local circulars reflect the BLTB's decision on these issues.  Among others things, the BLTB decides that the in-charge tax bureaus shall deem the development costs for LVAT deduction, which include preparation stage, construction / installation, infrastructure and indirect overheads if any of the following condition occurs: The property developer is not able to submit supporting documents regarding the development costs in accordance with the prescribed requirements; The information of the development costs submitted are untruthful; The LVAT verification report is proved to be problematic; The development cost is fraudulently declared; or The development cost declared is substantially higher than the standard set by the BLTB and no reasonable explanation is provided. Deductible development costs in relation to household properties, if deemed by the in-charge tax bureaus, shall be capped at the specific levels as detailed in Circular 138.   Tax investigation   Pursuant to Chapter 5 of Circular 134, the in-charge tax bureaus shall forward the LVAT reconciliation case to tax investigation teams for further action in the following situations: The LVAT verification report does not meet the prescribed standards, even after amendments as required by the tax bureaus; The in-charge tax bureau needs to refund overpaid tax as shown in the LVAT verification report; The taxpayer has not paid any provisional LVAT as required; The taxpayer is not able to submit additional documents (at the request of the in-charge tax authorities) within the prescribed timeframe; or The details in taxpayer's application of LVAT reconciliation are unacceptable after evaluation by the appraisal departments within the in-charge tax bureau. Uncertainties   Circular 187 contains a deeming provision that empowers local tax authorities to impose LVAT, in five situations, at a deemed rate directly on gross sales of a property developer.  The BLTB would separately determine the range of such "deemed rate" as indicated in Circular 134.   PwC observation   One can tell that the measures and standards set forth in Circulars 134 and 138 are rather detailed and strict.  They have closed several loopholes in the LVAT regime.  Property developers in Beijing are advised to take immediate actions to review their current LVAT compliance status and formulate remedy strategies for non-compliance if existing, in order not to be caught by the unfavorable provisions such as deemed development costs, deemed LVAT rate and tax investigation.   Meanwhile, we understand that the local tax authorities in other cities, such as Shanghai and Guangzhou, are currently mapping out local implementation rules following the principles in Circular 187.  PwC will closely monitor the development in this area and keep our readers posted of the progress. 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