What's Up With this VAT Tax Reform in China?

Get ready for a change that is right on the horizon in China.

Goodbye business tax (BT), hello value added tax (VAT).

It’s not quite as simple as that. Are taxes ever really that simple? But a process of tax reform is in progress in China that affects international business.

The tax changes have actually been in process for a little while now, but the reform hits full force August 1st, 2013.

Perhaps you’ve heard about the VAT reforms happening in China and have been wondering how it will affect your business’ import costs from China or export costs to China.

Here are the basics on what is happening.

On January 1st, 2012, China launched a pilot business tax/value added tax reform, testing the reform in Shanghai.

The reform moves many types of services from the BT system to the VAT system.

It is important to note that the reform does not remove the BT system from China altogether or transfer every kind of service to the VAT system. But logistics, importing and exporting goods to and from the country, certainly is affected.

VAT taxable services include transportation services, R&D and technology services, IT services, design services, transfer of trademark, goodwill and copy rights, intellectual property related services, advertisement, conference and exhibition services, logistics-related services, lease of movable tangible assets as well as certification, authentication and consulting services; and added by Tax Circular Caishui No. 37 is radio, film and television services.

Tax Circular Caishui No. 37 was released by the People’s Republic of China’s Ministry of Finance and the State Administration of Taxation in May. It expands the reform program as well as providing some ammendments.

During the last year, the reform has extended to more regions than just Shanghai. As of August 1st, the reform will take effect throughout the whole of China.

China has taken into account how well the pilot program worked in Shanghai for creating ammendments that are in the Tax Circular Caishui No. 37 to try to make the VAT system as effective as possible.

Talking about services moving from one system of taxation to another doesn’t mean much to the common person, even to the common businessperson. Isn’t that just stuff for my accountant?

What is a business tax versus a value added tax anyway?

A VAT is a consumption tax, which means the tax really falls on the consumer or buyer of a good or service rather than the manufacturer or service provider. For the buyer or consumer, it works as a tax on the purchase price of a good or service kind of like a sales tax.

For the manufacturer or service provider, a VAT is almost like an incentive program. The VAT system creates an input/output credit procedure that does not exist in the BT system.

Does my accountant know about these taxation system changes isn’t the real question. The real question for shippers who import or export goods from and to China is how will this affect me? What will it do to my bottom line?

On the minds of many is the question: Will this VAT system make importing goods from China more expensive?

Carriers have started releasing statements about how the VAT will affect their pricing.

In Thursday’s blog, we will look at some of those statements and at the VAT system in more detail to dig deeper into VAT reform in China which will hopefully give you, the shipper, a better idea of how changes on the horizon of China will affect the navigation of your business when it comes to international shipping.