China VAT: It's time to reap the savings The Dbriefs China Spotlight series Sarah Chin / Li Qun Gao / Candy Tang 20 June 2017
Agenda Latest development of China VAT rules Saving opportunities Future development Questions and answers 2
Latest development of China VAT rules 3
Overview of China VAT reform China VAT Reform is 1 year old now! Official statistics: significant tax deduction of RMB 1,200 billion from January 2012 to February 2017 as a result of the reform. 4
Feedback from industries According to the feedback, VAT burden for most of companies decreased, while that for certain industries increased. Positive feedback Negative feedback Deductible input VAT is about RMB 18M in one of our R&D projects, saving costs tremendously Fees on housing, leasing, and decoration takes up most of the costs of catering enterprises, but they all became deductible items after VAT reform. It is estimated that for the 20 new branches to be established, 10% of costs will be reduced due to VAT reform As a result of VAT Reform, 60% of taxpayers tax burden decreased, while others stay unchanged or slightly increase In one year period since VAT Reform, VAT payable declined by RMB 170M From May 2016 to April 2017, due to VAT reform tax burden declined by RMB 69.2M The compliance burden increases as the invoice management and compliance are more strict. Thus, the company needs more resources There are certain practical issues to be clarified Tax burden has been reduced by 0.7% for the new projects after VAT reform Internal process somehow needs to be re-design to ensure the compliance after the VAT reform 5
Polling question 1 According to the Chinese government, the VAT reform has successfully achieved a tax reduction for most of the industries. Whether your company s VAT burden has been reduced as a result of the reform? Yes, our tax burden has been reduced No, our tax burden has been increased Same as before Don t know / not applicable 6
Overview of China VAT reform (Cont d) Over 50 regulations were issued for the period from April 2016 to May 2017 Month Volume of Regulations issued March 2016 April 2016 May 2016 June 2016 July 2016 43 regulations were released during the past 6 months of the announcement of No. 36 August 2016 September 2016 October 2016 November 2016 December 2016 January 2017 February 2017 March 2017 April 2017 May 2017 Regulations to clarify technical issues Regulations for tax administrative matters 7
Important circulars and key contents Circulars Caishui (2016) 46 Caishui (2016) 68 Key contents Further clarification on the VAT exemption for certain interest income Reinsurance services generally should be subject to the same VAT treatment as the underlying insurance policy Caishui (2016) 70 SAT Bulletin (2016) 29 VAT exemption will apply to interest income derived from transactions among financial institutions and other some other items exempted from BT Clarification of the administration of the VAT exemption Elaboration of the term fully consumed concept Caishui (2016) 140 For the VAT liabilities of asset management products, the asset manager should be the VAT payer Caishui (2017) 2 The implementation of Cir140 is postponed to 1 July 2017 8
Simplification of VAT rates VAT rates simplification Starting from 1 July 2017, the VAT rate of 13% would be removed The relevant taxable supplies would be taxed under 11% instead 2% savings on tax rate 3 industries to be affected 1. Agricultural products, including grain/food, edible vegetable oil, feeds, chemical fertilizer, etc. 2. Public utilities, like tap water, heat supply, natural gas, etc. 13% 11% 3. Books, newspapers, magazines, etc. After this change, there would be three standard China VAT rates:17%, 11% and 6%. 9
Changes in terms of VAT invoice management E-invoicing Only electronic general VAT invoices can be issued, while electronic special VAT invoices are yet to be seen Widely adopted in certain industries, like telecom, bank, catering, and e-commerce Have to be issued through designed tax invoice issuance facility (golden tax machine) E-input VAT credit -no need to scan and verify Electronic input VAT credit applicable to Rate A, B, and C taxpayers Including special VAT invoice, freight charges settlement statement, unified invoice for sale of vehicle For those invoices could not be searched in the system, the verification could be performed by the scanner Starting from August 2016, newly included VAT payers can apply the input VAT verification rules depending on the compliance rating as the other VAT payers Verification period: Within 180 days (will be extended to 360 days from 1 July 2017) from the date the invoice is issued 10
Saving opportunities 11
Typical VAT leakage and possible solutions Case study 1 cross-border activities U.S. Supplier 1 60 (excl. VAT) 10.2 (import VAT) U.S. Company B 2 Company A 1 200 Domestic Supplier U.S. Parent C 3 80 (excl. VAT) 93.6 (incl. VAT) Overseas China Goods flow Service flow Background Company A purchases raw materials (60 excl. VAT) from domestic and overseas suppliers to manufacture products (80 excl. VAT) Company A exports finished goods to Company B in U.S. with the FOB price at 200 Company A provides services (such as marketing support, quality control of local vendors) to its U.S. Parent C and collects a service fee (100 excl. VAT) The export VAT refund rate is 15% Questions What is the VAT leakage over the supply chain? What are the potential solutions to mitigate the VAT leakage? 12
Typical VAT leakage and possible solutions Case study 1 cross-border activities (Cont d) U.S. Supplier U.S. Company B U.S. Parent C Supply of goods VAT Leakage 200 Overseas Irrecoverable VAT cost: standard VAT rate (e.g., 17%) vs. applicable export VAT refund (e.g., 15%) 1 2 3 China Input VAT credit balance to be recovered timing difference vs. permanent difference Potential solutions 60 (excl. VAT) Company A Possibility to utilize Processing Trade Relief (PTR)? 10.2 (import VAT) 1 80 (excl. VAT) 13.6 (input VAT) Domestic Supplier Goods flow Service flow 13
Typical VAT leakage and possible solutions Case study 1 cross-border activities (Cont d) U.S. Supplier U.S. Company B U.S. Parent C Supply of goods Potential solutions 200 Overseas Comparison before / after PTR Item Normal trade PTR 1 2 3 China Input VAT 23.8 13.6 60 (excl. VAT) 0 (import VAT) Company A (under PTR) 1. Domestic purchase VAT 2. Import VAT 10.2 13.6 13.6 0 (bonded status) 1 80 (excl. VAT) 13.6 (input VAT) Irrecoverable VAT cost 4 (=200*(17% -15%)) 2.8 (=(200-60)*(17%-15%)) Domestic Supplier Goods flow Service flow Regulatory requirements and additional admin and compliance cost 14
Typical VAT leakage and possible solutions Case study 1 cross-border activities (Cont d) Supply of goods U.S. Supplier U.S. Company B 200 U.S. Parent C Potential solutions Possibility to maximize the savings by increasing the bonded import amount through U-turn arrangement? Overseas China 1 60 (excl. VAT) 0 (import VAT) 2 Company A (under PTR) 3 Bonded Logistics Park (BLP) Item Normal trade U-turn Input VAT 23.8 10.2 1. Domestic purchase VAT 13.6 0 (assuming no irrecoverable VAT cost at the export to the BLP) Domestic Supplier 1 80 (excl. VAT) 0(input VAT) Goods flow Service flow 2. Import VAT 10.2 0 Irrecoverable VAT cost 4 (=200*(17% -15%)) 1.2 (=(200-60- 80)*(17%-15%)) Additional irrecoverable VAT cost, admin and logistics cost for exporting raw materials Potential challenges from Customs on U-turn 15
Typical VAT leakage and possible solutions Case study 1 cross-border activities (Cont d) Supply of services U.S. Supplier U.S. Company B U.S. Parent C VAT leakage Irrecoverable VAT cost for U.S. Parent C: 6 (=100*6%) China VAT due on supply of services is not recoverable by the foreign entity Overseas 100 (excl. VAT) Potential solutions China 1 2 3 6 (output VAT) Possibility to apply for VAT exemption / zero-rating treatment under business process outsourcing (BPO)? Company A 1 Marketing support service Quality control service Other considerations Consideration related to the requirements of fully consumed outside China, especially not related to tangible goods located in China? Domestic Supplier Goods flow Service flow Possibility to segregate the goods related part (e.g., quality assurance / inspection) and non-goods related part (e.g., market intelligence collection, etc.)? Zero-rating vs. VAT exemption, i.e., savings on input VAT credit vs. compliance burden 16
Typical VAT leakage and possible solutions Cross-border services - zero-rating treatment Activitiessubject to zero-rating treatment International transportation services Space transportation service Services provided to overseas entities and fully consumed outside China (newly defined in Cai Shui[2016] No. 36) R&D services Contracted energy management services Design services Production and distribution of radio, film and television programs Software development services Circuit design and testing services Information system services Business process management services Offshore outsourcing services Technology transfer Other services specified by MOF and SAT From 1 December 2015 onwards, VAT zero-rated treatment also applies to certain offshore outsourcing services and other specific services It is expected that the scope of businesses / services subject to VAT zero-rated treatment will be expanded In-charge tax bureaus will have more stringent verification of eligibility to refund of input VAT the administrative costs of providing documentary evidence to in-charge tax bureaus will increase, and hence there are more cases of failure in obtaining VAT refund Taxpayers may elect to use VAT exemption treatment instead of using VAT zero-rated treatment, but once made the choice cannot be revoked within 36 months Taxpayers may elect to use VAT exemption or zero-rated treatment if both treatments apply to the transactions 17
Typical VAT leakage and possible solutions Cross-border services - VAT exemption treatment Activities eligible for VAT exemption Specificservices rendered outside the PRC Construction services for projects located outside the PRC Project supervision services for projects located outside the PRC (new) Geotechnical investigations, surveying and exploration services for projects, and mineral resources located outside the PRC Conference and exhibition services for conferences and exhibitions held outside the PRC Storage services where the storage sites are located outside the PRC Leasing of tangible and movable goods where the leased objects are located outside the PRC Broadcasting and distribution of radio, film, and television programs outside the PRC Cultural, sports, educational, medical care, and tourism services provided outside the PRC Services related to exported goods Postal services for exported goods Pick-up and delivery services for exported goods Insurance services for exported goods International transportation services without providing vehicle carrier directly Direct-charge financial services for financing transactions between overseas entities, and such services are not related to any goods, intangible assets or real estate in the PRC Serviceand tangible assets provided to overseas entities and fully consumed outside China (newly defined in Cai Shui[2016] No. 36) Telecommunication services Intellectual property related services Ancillary logistics services (excluding storage services, pick-up and delivery services) Assurance and consultation services Professional and technical services Business support services Advertising services for ads published outside the PRC Use of intangible assets Other services as provided by MOF and SAT 18
Typical VAT leakage and possible solutions Practical difficulties The concept of fully consumed outside China Cai Shui [2016] No. 36 stipulates the criteria of fully consumed outside China for enjoying VAT zero-rating / exemption treatment includes the following 1) The actual service recipients are located outside China, and the transactions are NOT related to tangible goods and immovable properties located in China 2) The intangible assets are deployed fully outside China, and the transactions are NOT related to goods and immovable properties located in China 3) Other situations as specified by the MOF and SAT How to interpret actual service recipients? How to interpret not related to tangible goods and immovable properties located in China Variations in terms of interpretations by different tax bureaus 19
Polling question 2 Has your company successfully obtained the approval to enjoy VAT zero-rating or exemption treatment? Yes, quite straightforward Yes, quite difficult No Don t know / not applicable 20
Typical VAT leakage and possible solutions Case study 2 loss-making companies Clients Company A (around RMB 100m input VAT credit balance) Background Company A is a manufacturing company located in China Company A is in a loss-making position and incurs a significant input VAT credit balance on book (around RMB 100m) The management is considering dissolving this company or merging to another company in China Question How to utilize Company A s input VAT credit balance? Suppliers Invoice flow 21
Typical VAT leakage and possible solutions Case study 2 loss-making companies (Cont d) Clients Potential solutions Cash refund of input VAT credit balance is yet to be seen in China 1 Several potential solutions to utilize the input VAT credit balance Company A (around RMB 100m input VAT credit balance) 2 Company B Group Create VAT-able supplies to generate output VAT to absorb input VAT, such as transfer intangible assets (IP, customer list, etc.) Suppliers Transfer Company A s input VAT credit balance to related party (such as Company B) within the same group through merger Considerations Invoice flow Business feasibility Regulatory requirements and practical obstacles 22
Future development 23
Future development After the VAT reform, the next task is VAT legislation Some of the points related to VAT legislation and related actions below VAT neutrality SAT / MOF are working on areas where VAT becomes a cost such as the interest, export VAT refunds, etc. Communication platform Allow a productive discussion with taxpayers VAT law Planned for 2018 the MOF / SAT are in the process of doing industry investigation and surveys to understand the impact of the current VAT rules, industry pursuits, and change directions Consolidation of rules Future on e-commerce Future on grouping 24
Future development (Cont d) Another focus is on VAT management and more VAT focused audit / inspection may be seen E-audit Phase III of Golden Tax System (GTS) was launched to cover all tax filing categories nationwide and provide the Big Data, which forms the base for the tax authority to do E-audit. Post reform investigation the VAT invoice investigation in 2016, followed by specific investigations on export VAT refund fraud, issuance of fake VAT special invoices, and high risk enterprises in 2017. Further refining of the VAT rules more supplementary rules may be issued to provide clarification to certain tax issues, such as Bulletin No. 140 that clarifies certain practices for financial industries. Expansion of the zero-rated scope more preferential tax treatments may be expected, like expansion of the zero-rated scope. It is expected that the scope of businesses / services subject to VAT zero-rated treatment will be expanded. 25
Our observation of the market reaction 1.Robotic Process Automation 2.Internal control enhancement 3. Automation of VAT compliance 4. Benchmarking best of class 26
Questions and answers
Thanks for joining today s webcast. You may watch the archive on PC or mobile devices via itunes, RSS, YouTube. Eligible viewers may now download CPE certificates. Click the CPE icon at the bottom of your screen.
Join us 28 June at 2PM HKT (GMT +8) for our Special Edition webcast: Multilateral convention signed: Impact on bilateral tax treaties For more information, visit www.deloitte.com/ap/dbriefs
Dbriefs Bytes This video brings you a weekly summary of the significant international tax developments. It is broadcast every Friday afternoon. Dbriefs Bytes is also available in Chinese and is broadcast every Tuesday. For more information, visit www.deloitte.com/ap/dbriefs/bytescentral To view archives, visit www.youtube.com/deloittedbriefsap
Contact information Sarah Chin Tax Partner Deloitte Hong Kong, China sachin@deloitte.com.hk Li Qun Gao Tax Partner Deloitte Shanghai, China ligao@deloitte.com.cn Candy Tang Tax Director Deloitte Shanghai, China catang@deloitte.com.cn
This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.
About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.