China’s VAT updates take effect next week
Two important changes to China’s value-added tax (VAT), announced in late March by China’s Ministry of Finance (MOF) and the State Administration of Taxation (SAT), will become effective on May 1, 2018. Both measures, detailed below, are part of a plan to cut taxes by RMB 400bn (USD 63bn) this year to drive “high-quality development”.
1. Reduced VAT rates (Circular 32)
China currently has three VAT tax brackets: 17%, 11%, and 6%. The new measure will cut VAT rates from 17% to 16%, and from 11% to 10%, while the 6% bracket will remain unchanged. Export VAT refund rates will also be reduced from 17% and 11% to 16% and 10% respectively, with transitional rules applying until 31 July 2018.
Categories affected by the VAT cuts include:
- Manufacturing and sales/importation of goods: from 17% to 16% VAT rate
- Transportation, construction, telecommunication services and agricultural products: from 11% to 10%
- Carry out a thorough analysis to decide whether/how to adjust your sales prices
- Review and update your systems, contracts, and other documents accordingly
- For trading companies: make sure that goods purchased at 17%/11% VAT rates are exported before 31 July in order to obtain a full VAT refund
2. New limits to qualify as “small-scale taxpayer” (Circular 33)
Small-scale VAT payers in China benefit from a simplified tax structure and lower VAT rate of 3%. Until now, the maximum annual sales to qualify as a small-scale taxpayer varied by industry. The new measure establishes a unified threshold: any business that sells up to RMB 5mn annually can enjoy small-scale VAT payer status.
Industries affected by the new thresholds include:
- Manufacturing: companies can now take in up to RMB 5mn in annual sales (up from RMB 500,000) to qualify as a small-scale VAT payer
- Trading: companies can now take in up to RMB 5mn (up from RMB 800,000) to qualify as a small-scale VAT payer
- If your annual sales fall within the new limit, you can opt to convert from general to small-scale VAT payer status before December 31, 2018
- Consider all implications of changing your taxpayer status before taking a decision, e.g. small-scale VAT payers cannot issue/request “special VAT fapiaos”
Get in touch with Fiducia’s Tax Advisory Team to discuss further details about these tax updates and what they mean for your business.