Chinese VAT reforms could result in loss of profits

19 April 2016

David Wilson

On 1 May 2016, China will implement a significant raft of reforms resulting in substantial changes to its federal indirect tax systems. Historically, VAT has only been applied to transactions in goods and a limited range of manufacturing-related services. Most other services have been subject to Business Tax (BT). 

On 1 May, China’s VAT base will be significantly extended as a broad range of services will cease to be liable to BT, but will become subject to VAT.

In common with most VAT systems, changes to the Chinese VAT provisions will affect non-resident service providers, particularly those involved in real estate, construction, financial and insurance services and ‘lifestyle’ services; ie medical and healthcare, education, food and beverage, hospitality and entertainment services. 

In general, a business with no establishment in China undertaking taxable activities in China is unable to register and account for VAT. 

Under the new VAT reforms, a withholding procedure will be introduced meaning that, unless existing contracts specifically state that the fee payable is exclusive of any tax that may become due and payable, a proportion of the value of the service provided, equivalent to the VAT, will be withheld by the Chinese customer and paid to the Chinese tax authorities. 

Unless appropriate action is taken, Chinese VAT reforms could result in non-resident suppliers of qualifying services actually being paid less than the invoiced value of the services. 

Businesses providing services to Chinese customers are therefore urged to take advice on the extent to which the service is of a type which will become subject to the new Chinese withholding VAT, and whether contracts need to be renegotiated, or agreement reached that the invoiced value can be uplifted by an equivalent to any VAT that may be due and payable in China.

If you would like to discuss any of these points further, please contact David Wilson or your usual RSM contact.