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China reduces VAT rates and thresholds

Following the sweeping changes to China’s tax laws in 2016, when business tax was effectively replaced by an enhanced value-added tax (VAT) system, there will be further changes to the VAT system on 1 May 2018.

Regulations can change very quickly in China and, as we always advise, it is essential to take action to adjust and determine how your operations will be affected. This is especially true for foreign firms when it comes to any tax-related matters. This article will briefly outline the changes to the system and highlight what actions, if any, you may need to take.

A Circular on Changing the VAT Rates (Caishui [2018] No .32) was jointly issued by Ministry of Finance and State Administration of Taxation in March to announce that China will lower its value-added tax (VAT) rates and expand the criteria for businesses to qualify as small-scale VAT taxpayers, as part of a tax cut package.

As of 1 May, the existing VAT rates of 17% and 11% will be lowered to 16% and 10% respectively. The following table gives an overview of the impact on specific industries:

Another significant change relates to ‘small-scale VAT taxpayers’, which enjoy a reduced VAT rate of 3%. China has expanded the criteria to qualify such that small-scale VAT taxpayers are now defined as those whose annual sales are less than RMB 5 million (USD 795,000), whereas before there were three different tiers of small-scale VAT taxpayers. Additionally, new incentives have been introduced for companies in the manufacturing and research and development (R&D) sectors.

As is often the case with new regulations in China, there is still some ambiguity. For example, the new circular did not set out precise details for all sectors of the economy. As always, it pays to keep a close eye on these developments and do not be surprised if further amendments are made in the not too distant future. Sovereign China’s experienced accountancy team can assist with any questions or concerns surrounding the recent changes.

 

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