China Tax/Business News Flash 

The recent global financial crisis has brought unprecedentedly significant impact to the global economy.  As a response to current instability and challenges lying ahead to the domestic economy, the Chinese State Council has proactively come up with and announced on 9 November 2008 ten fiscal measures, collectively earmarked as "Economy Stimulation Plan" to combat the adversity brought / to be brought by the tumultuous international economic environment.  As reported, the overall new investments under this "Economy Stimulation Plan" could amount to RMB4 trillion (or US$586 billion) to be input by 2010.

1. Nation-wide coverage
2. Applicable to virtually all industries; and
3. Full input VAT recovery

Please refer to the above mentioned Issue for more background information.  These features have now been confirmed and the effective date of the Transformation is 1 January 2009.  In addition, the following new features are worth-noting:

• Applicable on new purchase of "equipment"
  

  The Transformation applies to "equipment" newly purchased on or after 1 January 2009.  The scope of "equipment" covers machines, machinery and means of transportation and other equipment, tools and utensils related to production and operation.  Immovable properties such as building and structure are not included in the scope.  However, input VAT recovery is specifically disallowed for the purchase of small motor cars, motor cycles and yachts that are subject to Consumption Tax and could be used for private purposes.

  Close

  
  
  
  
• Carry-forward of excess input VAT
  

  If the amount of input VAT recoverable is greater than the amount of output VAT charged on sales within a VAT reporting period, the excess input VAT may be used to offset future output VAT.  No refund of excess input VAT shall be granted.

  Close

  
  
  

• Cancellation of import VAT exemption treatment for imported equipment
  

  There has been a preferential VAT treatment on importation of equipment from overseas by exempting the import VAT for equipment brought from overseas.
    
  As reported in the MOF/SAT press conference, this preferential VAT treatment has brought problems, such as unfair tax burden between foreign investment enterprises and domestic enterprises.

  Close

  
  
  
  
• Cancellation of VAT refund treatment of "domestically-made" equipment purchased by foreign invested enterprises
  

  This preferential VAT treatment will be cancelled as the input VAT incurred on the purchase of "domestically-made" equipment should be creditable under the forthcoming Transformation.

  Close

  
  
  
  
• Reduction of VAT collection rate for small-scale VAT taxpayer
  

  The VAT collection rates for the small-scale commercial enterprises (4%) and manufacturing and other enterprises (6%) will be reduced to 3%.  Since these enterprises will not be benefited from the Transformation which is only applicable to General-VAT taxpayers, such VAT collection rate reduction policy is introduced to alleviate their VAT burdens.
    
  Also the MOF and SAT announced that the minimum-income thresholds for collection of VAT and Business Tax will be raised to help the development of small businesses.

  Close

  
  
  
  
• Resumption of VAT rate of mineral products to 17% (from 13%)
  

  Mineral products have been subject to the reduced VAT rate of 13% with the aim to stimulate development of the mining industry.
    
  As the Transformation will allow input VAT to be recovered on equipment to be purchased by mining businesses, the overall VAT burden could be lowered.  This, together with the goals to promote resource conservation and environmental protection, the VAT rate of mineral products will be shifted back to the standard rate at 17%.

  Close

  
  
  
  

• Macro
  

  • The Chinese government is determined to withstand the turbulence of the current global financial market while sustaining the economic growth.  Changes to the VAT system (e.g. the recent rounds of increase in export VAT refund rates and the forthcoming Transformation) have been adopted as an integral part of its plan to meet the objectives.
     
  • The forecast on the budgetary impact due to the Transformation would amount to RMB120 billion.  The magnitude of the changes is reported to be the most significant change on a single type of tax throughout the Chinese tax reform history so far.
     
  • It is apparent that the Chinese government now uses VAT regime to play an increasingly important strategic role in the adjustment of the Chinese economy, rather than merely a tax raising tool.
     
  • This upcoming VAT reform is just a first step and the amendments to the Turnover Tax regulations are the next.  There should be more massive and critical adjustments to VAT, and the other two Turnover Tax systems in future.

  Close

  
  
  
  
• Micro
  

  • It is obvious to see that the Transformation is the core of this round of VAT reform.  It is seen as a welcoming move to alleviate the VAT burden for taxpayers in general, which is most needed in the time of the economic downturn.
     
  • All the other components introduced in this reform are either elimination of the existing preferential treatments to avoid duplication (i.e. cancellation of import VAT exemption treatment for imported equipment; cancellation of the VAT refund treatment of "domestically-made" equipment purchased by foreign invested enterprises; and resumption of VAT rate of mineral products), or matching of the benefit (i.e. reduction of VAT collection rate for small-scale VAT taxpayer).
     
  • With regard to the cancellation of import VAT exemption treatment for imported equipment, it may potentially hit the import costs for some businesses that are not registered as General-VAT taxpayers, because they would not be able to recover the import VAT to be paid upon equipment import into China.  It is also unclear whether the customs duty exemption applicable for importation of equipment used to be granted together with import VAT exemption would be affected.
     
  • The cancellation of the VAT refund treatment of "domestically-made" equipment purchased by FIEs may potentially jet up the cost for some businesses.  For instance, as the input VAT incurred on the purchase of "domestically-made" equipment would no longer be refundable but only creditable, it may take a long time for export orientated manufacturing FIEs with small domestic sales to offset the excess input VAT.  This may create cashflow pressure to these businesses.
  
  

  Close