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Effective May 1, 2016, China’s four-year transition from a business tax to a value-added tax (VAT) system will be complete. Those businesses still using 5% business tax will convert to different VAT rates. The majority of business tax payers will convert to 6% VAT rate for services (or 3% for small-scale taxpayers). Included in the transition to the 6% VAT rate are the finance industry as well as “life services”, a vague industry category that includes food and beverage, travel, education, etc. Notably, both the construction and real estate sectors will transition to the higher 11% VAT rate which already includes transportation, postal, and basic telecommunications services.
While the transition to VAT means more control by China’s central government over tax matters and potentially less tax revenue to local governments, the tax changes bring bottom-line benefits and greater consistency to the operations of foreign investors. In addition, certain services will enjoy a VAT exemption period to further encourage growth; foreign investors in these sectors will see their tax burden significantly reduced. Promoted services include nurseries and day-cares, medical services, education services, elderly services, and others. The tax relief for these service sectors is part of the central government’s overall push towards a greener and more service-oriented economy.
If your company has operations in or does business in China or with Chinese companies, this tax system change might significantly impact your business and operational costs. Talk to an attorney at Ally Law member firm to determine how this change will impact you and what steps you need to take to comply with the tax change and any reporting and filing requirements. Ally Law member firms have attorneys experienced in tax law and business law in all jurisdictions. For more information about our services in this area, contact us at yourally@ally-law.com.
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By Simon Robertson of R&P China Lawyers. R&P China Lawyers is hosting fellow members of Ally Law this May in Shanghai, China. Updates on the meeting will be posted in Global Matters.
