China confirms VAT reform, but questions remain

VAT is the most important of China’s 18 existing taxes, in terms of contribution to the state. Therefore, it is no surprise that considerable care, and several years of deliberation, preceded the current reform package. While the rates of VAT will not change because of these reforms, there are several important changes that will affect businesses that operate in China, or who trade with Chinese individuals. Therefore, some care and preparation is important and while this article looks at some of the key takeaways it is by no means a complete analysis of the changes as much remains uncertain at this time.

Defining a Chinese transaction

The new legislation stipulates that any goods or services consumed in China are subject to Chinese VAT, whereas in the past, the test relied on the purchaser being established in the territory. 

Claiming a refund of Chinese VAT

In good news for taxpayers, and contrary to previous practice, the legislation formalises a right to reclaim Chinese VAT. In the past, many taxpayers were only entitled to carry forward a credit for the VAT they were entitled to.

Determining the VAT rate

Sellers making hybrid sales (a bundle of goods and services that attract different rates of VAT) will be required to identify the principal supply and apply VAT appropriately. However, this analysis must be conducted at a transaction level and not by reference to the taxpayer’s wider business. 

Valuation powers

Specific anti-avoidance legislation will be introduced that will prevent businesses from trying to utilise losses that will otherwise go out of time.

What next?

While the new legislation brings important change that must be considered with care, there remains some areas of uncertainty. The definition of transaction documents that are required under VAT law remains unclear along with the reclaim of some VAT for businesses that make VAT-exempt supplies. Therefore, businesses should remain alert to future announcements on this topic.