New Turnover Tax Reform and Pilot Program in Shanghai
Unlike many other countries, China adopts both business tax ("BT") and value-added tax ("VAT") in its turnover tax regime. VAT mainly applies to the sale of goods and BT is mainly levied on taxable services.
China’s tax authorities have recently introduced a long-awaited pilot program heralding the reform of this regime. The reforms would result in the merger of China’s existing VAT and BT into a single turnover tax. Such reform could have far-reaching implications for domestic and foreign suppliers of goods and services in China, affecting overall tax burdens and the allocation of tax burdens in the supply chain and could prompt changes in business models that suppliers have adopted for China.
The details of the pilot program were announced in Pilot Program for Conversion of Business Tax to Value-Added Tax, Cai Shui [2011] No 110 (“Notice 110”) and Notice Regarding the Implementation of the Conversion of Business Tax to Value-Added Tax in the Transportation Industry and Certain Modern Service Industries in Shanghai, Cai Shui [2011] No. 111 (“Notice 111”), both jointly issued by the Ministry of Finance and the State Administration of Taxation in November 2011. Notice 110 lays out the general framework of the pilot program and Notice 111 addresses the specifics of the Shanghai pilot program which began implementation on 1 January 2012.
The Shanghai pilot program covers suppliers of road, water, air and pipeline transportation services, as well as suppliers in certain "modern service" industries. The modern service industries listed in Notice 111 include R&D and technology services, information technology services, design services, intellectual property services, advertising services, meeting and exhibition services, logistics, leasing of movable property and certification services. Suppliers in these sectors currently pay BT and will pay VAT on these services under the pilot program.
As is currently the case for VAT taxpayers in the manufacturing and distribution sectors, suppliers of services under the pilot program will be divided into general VAT taxpayers and small-scale VAT taxpayers. General VAT taxpayers are able to credit input VAT against output VAT. Small-scale VAT taxpayers are not permitted to do this. Taxpayers with annual taxable service revenues of RMB5 million or more must apply to be certified as general VAT taxpayers.
The new regulations stipulate the following VAT rates for general VAT taxpayers:
· 17% on leasing of movable property;
· 11% on transportation services;
· 6% on ‘modern services’ (except for leasing); and
· 0% on certain other services designated by the authorities
For small-scale VAT taxpayers, the VAT rate will be 3%.
Although the pilot program will be implemented first in Shanghai, it will affect not only Shanghai suppliers in the service industries, but other taxpayers throughout China and abroad that do business with these Shanghai suppliers.