VAT Reforms in China IT, consulting, advertising & intercompany services

Transcription

1 VAT Reforms in China IT, consulting, advertising & intercompany services KPMG in China Lachlan Wolfers and Roger Di May 2012

2 Agenda Setting the scene How the VAT pilot program operates Specific implications for businesses Practical steps Major risk areas or issues Opportunities How KPMG can help you

3 Pre-reforms Business Tax VAT Consumption Tax 2

4 Post-reforms VAT Business Tax Asset Leasing Goods Transportation Modern Services Consumption Tax 3

5 Indirect tax reforms Beijing 1 Jan Sept 2012 Shanghai Beijing Beijing Tianjin Tianjin Anhui 1 Oct Jiangsu and Anhui Tib et Chongqing Jian gxi Fuj ian Jiangsu Shanghai Shanghai Zhejiang Fujian Jiangsu 1 Nov Dec 2012 Fujian and Guangdong (including Shenzhen) Tianjin, Zhejiang and Hubei Hubei Shenzhen Guangdong 2013 and after The remaining cities and provinces in China Expansion by scope likely in 2013: Financial Services Real Estate & Construction Entertainment Post & Telecoms 4

7 VAT reform decision matrix Services Registration VAT Liability? Concessions Place of supply 6

8 VAT pilot scheme industries & rates Industry VAT Rate Leasing of tangible movable property 17% Transportation services 11% Research and development (R&D) and technical services 6% Information technology (IT) services 6% Cultural and creative services 6% Logistics and ancillary services 6% Certification and consulting services 6% Small scale VAT taxpayers 3% 7

9 VAT pilot scheme scope of services R&D and technical services includes: R&D services, technology transfer services, technical consulting services, energy contract management, engineering, reconnaissance and exploration services Scope R&D services Technology transfer services Technical consulting services Energy contract management Engineering, reconnaissance and exploration services Definition Research, experiment and development of new technology, new products, new techniques or new materials and the related systems Transfer of the ownership or use right of patented or non-patented technologies Feasibility study services, technology forecasting services, special technology survey services, analysis and evaluation report services and professional knowledge services for special technical projects Feasibility study services, technology forecasting services, special technology survey services, analysis and evaluation report services and professional knowledge services for special technical projects Field surveys conducted for terrains, geological structure, underground resources conditions prior to mining and project constructions 8

10 VAT pilot scheme scope of services IT services includes: production, collection, process, storage, transportation, search and utilization of information via computers and communication networks and provision of such information services, including software services, circuit design and testing services, information system services and operational flow management services Scope Software services Circuit design and testing services IT system services Operational flow management services Definition Provision of software development, consultation, maintenance and testing services Provision of integrated electronic and circuit products design, testing services and relevant technical support services Provision of information system integration services, network management services, desktop management and maintenance services, information system application services, basic IT management platform integration services, IT related basic infrastructure management services, data centre, hosting centre and security services IT based business activities related to the provision of HR management services, financial and economic management services, financial payment services, internal data analysis, call centre services and e-commerce services 9

11 VAT pilot scheme scope of services Cultural and creative services includes: design services, trademarks and copyrights transfer services, intellectual property services, advertising services, and convention and exhibition services Scope Design services Intellectual property services Advertising services Convention and exhibition services Definition Projecting the plan, program and idea through visual, text and other forms, including industrial design, style design, fashion design, environmental design, graphic design, packaging design, animation design, exhibition design, website design, mechanical design, engineering design and creative planning Dealing with intellectual property matters, including agency, registration, verification, evaluation, certification, consulting, search services for patents, trademarks, copyrights, software and integrated circuit design Propaganda and related services for goods, business services, cultural and sports programs, notices, announcements, and other matters entrusted by the client through books, newspapers, magazines, radio, television, film, slides, signs, posters, window display, neon signs, light boxes, Internet and other various media Facilitating commodity circulations, promotions, shows, business and trade discussions, non-governmental exchanges, enterprise communications and international exchanges 10

12 VAT pilot scheme scope of services Certification and consulting services includes: certification services, verification services, and consulting services Scope Certification services Verification services Consulting services Definition Activities where qualified professional institutions use detection, inspection, measurement techniques to prove that products, services, management systems comply with the relevant technical specifications and technical specifications in compliance with certain mandatory requirements or standards Activities where qualified professional institutions assess the commissioning party's economic activities and relevant information, and issue probative opinions, including accounting, taxation, asset valuation, lawyers, real estate and land evaluation and construction costs reports Activities to provide information or recommendation on finance, tax, legal, internal management, operations and process management 11

13 Registration Compulsory RMB 5 million (US$800,000) annual sales income Optional 12

14 Place of supply - domestic Location of supplier Location of services VAT or BT In a city/province subject to the VAT pilot program In a city/province subject to the VAT pilot program In a city/province subject to the VAT pilot program Elsewhere in China VAT BT, but credit allowed against VAT payable (very limited application in practice) Elsewhere in China In a city/province subject to the VAT pilot program Elsewhere in China Elsewhere in China BT BT Rule of thumb: If you paid BT previously, and those same services are now within the scope of the pilot program, then you now pay VAT. It does not matter where the customer is located in China 13

15 Place of supply - cross border Location of supplier Location of recipient / place of consumption In a city/province subject to the VAT pilot program Outside China VAT treatment Zero rated or exempt Outside China Outside China Outside China In a city/province subject to the VAT pilot program Services consumed wholly outside China Leased goods used entirely outside China If no agent, recipient may claim input VAT credit subject to documentary requirements Not subject to VAT Not subject to VAT 14

16 Key VAT implications for cross border services Exports: Output VAT Creditable input VAT Zero - rating No Yes Imports: Exempt No No Output VAT Creditable input VAT Agent or purchaser Withholding of VAT Yes, if general VAT taxpayer Services consumed wholly outside of China: foreign entities providing services to Chinese entities which are fully provided and consumed outside China foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China 15

17 Exported Services Circular 131 Industry VAT treatment R&D and technical services IT services VAT zero-rating R&D and design services provided to overseas entities VAT exemption Engineering as well as exploration services with the related project or mineral resources located outside mainland China Technology transfer, technology consulting, energy management services (except where the object of the energy management contract is located in mainland China) provided to overseas entities Software services, circuit design and testing services, business process management services provided to overseas entities 16

18 Exported Services Circular 131 Industry VAT treatment Cultural and creative services VAT zero-rating Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China) VAT exemption Convention and exhibition services located outside mainland China Trademark and copyright transfer services, intellectual property services provided to overseas entities Advertising services where the related advertisement is released outside mainland China Certification and consulting services Certification, verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China) 17

19 Procedures for claiming zero rating for exported services Announcement 13 applies to businesses that export international transportation services, R&D services; and design services under the VAT pilot program. Business must be granted exempt, credit, refund (ECR) status before they can commence submitting VAT refund reports and applying for zero rated VAT refunds or credits. They must also comply with the following: Service provided R&D services Design services Approval procedures Bank account permit/license Registration certificate of technology export contract Bank account permit/license Registration Certificate of Technology Export Contract Zero rated VAT refund or credit documentation requirements ECR Return / Application Zero-rated Taxable Services (R&D, Design Services) Tax-exempt Refund Application Detail Tables (form yet to be released) Current period VAT Return Tax-exempt Refund Application Official Electronic Data The following original certificates: Registration Certificate of Technology Export Contract applicable to the R&D or design services provided to the foreign enterprise (copy only) The R&D or design services contract pertaining to the zero-rated VAT services provided Invoice for zero-rated services Detailed Breakdown of Revenues Received From Providing R&D and Design Services provided to Foreign Entities (form yet to be released) Other documents capable of reflecting and certifying revenue composition received in relation to the agreed R&D or Design service contracts Other certificates as requested by the competent tax authorities 18

20 Procedures for claiming exemption for services The tax authorities in Shanghai have not yet published the documentation requirements for claiming exemption from VAT: 1) Circular 111 only contemplates procedures being issued by the Ministry of Finance / State Administration of Taxation for zero rating, not exemption. 2) Some taxpayers are being asked to pay VAT on exported services, with a refund to be given when the procedures are published and satisfied. 3) Other taxpayers are being asked to self-assess eligibility for exemption. The Changning District Tax Bureau in Shanghai have issued procedures for taxpayers located in its boundaries. Taxpayers must provide the following in order for the exported service to be exempt from VAT: the application form; the contract; foreign income transaction records; receipts; and any other requested documents 19

21 Other concessions Concession VAT treatment Input VAT credits Technology transfers by pilot taxpayers Offshore outsourcing services by businesses registered in cities/provinces subject to the VAT pilot program Pipeline transportation services Approved finance leases Exempt from VAT Exempt from VAT VAT levy first and refund later for VAT burden in excess of 3% VAT levy first and refund later for VAT burden in excess of 3% No No Yes Yes 20

23 Implications for businesses - industry specific rules General rule: Income VAT payable Output VAT VAT liability Output VAT input VAT Gross basis: Gross revenue x 6% VAT Specific rule for taxpayers who previously paid BT on a net basis: Income VAT payable Output VAT VAT liability Output VAT input VAT Net basis: (Gross revenue allowable deduction) / (1 + VAT rate) x VAT rate 22

24 IT industry example Beijing Co sells software products: VAT applies at rate of 17% refund where tax burden >3% per Caishui [2011] 100 Beijing Co now generates input VAT credits from the payment of royalties As a result of the VAT reforms Beijing Co: may generate additional input VAT credits: this reduces tax burden this reduces the refund therefore, there is no real benefit from the VAT reforms 23

25 IT industry example - royalty VAT 6% Gross up for VAT WHT on VAT-inclusive amount? VAT pilot program Software Co Input VAT creditable Royalty Licence of IP rights U.S. Head Office Cash flow Service flow 24

26 IT industry example maintenance v repair Provision of maintenance services Customer VAT pilot program IT Co. Sale of equipment 17% VAT Previously, incentive to characterise maintenance as a service, not a repair Now, is maintenance service subject to 6% VAT or 17% VAT? When does it matter? 25

27 Advertising example - agency in a city subject to the VAT pilot program Customer Input VAT or Revenue deduction Gross income 6% output VAT Advertising publisher (e.g.media) VAT pilot program advertising agency Advertising publication fee Input VAT creditable Cash flow Invoice flow 26

28 Advertising example - agency outside a city subject to the VAT pilot program Customer BT deduction for fee only, or fee + VAT? Gross income 5% BT VAT pilot program advertising publisher (e.g.media) Non-VAT pilot program advertising agency Advertising publication fee Input VAT creditable Cash flow Invoice flow 27

29 Intercompany support services example - imports Mainland China Overseas City subject to the VAT pilot program Tax authority Head Office Other branches Issues: Need to ensure service within the scope Gross up for VAT withholding Meet documentation requirements for claiming input VAT credit Interaction with transfer pricing 28

30 Consulting services example - exports Mainland China Overseas City subject to the VAT pilot program Tax authority Head Office Other branches Issues: Need to ensure service within the scope of the pilot program Service must not relate to goods or real estate in mainland China Comply with procedures for claiming exemption Transfer out input VAT Interaction with transfer pricing 29

32 Practical steps - impact of VAT reforms on profitability BT Regime VAT Regime Sales Revenue ($) 100? Tip 1: Try to Seek to pass on pass on VAT VAT to costs to customers customers BT 5% 5 N/A VAT output ($) N/A? Costs of Sales($) 80? Ensure cost savings of suppliers is passed on VAT - input($) N/A? Profit($) Maximise input VAT credits 31

33 VAT Ready Sourcing of services Consumer Demand changes Supply chain IT systems Contracts Intragroup services Staff travel & entertainment Registration & Invoicing VAT Ready Pricing A/C s payable A/C s receivable Insourcing v outsourcing Supplier Cost savings Training Exports / imports of services Cashflow Small scale taxpayers 32

34 How do I implement reforms timeline Now Date of implementation Month after implementation Finance and Tax Business Legal VAT taxpayer registration Internal training for relevant functions Financial impact study VAT invoice and reporting process design Assess pricing implications Review current vendor status (assess their savings) Communicate and negotiate with customers and vendors Review contract terms can VAT be passed on Where VAT cannot be passed on, can you renegotiate? Amending standard contracts to allow for VAT pass on Use new financial and tax system Implement new VAT invoice and reporting process monitor the working flow Follow up on new rules work TOGETHER to get VAT READY IT Business system review and upgrade Financial and tax system review and upgrade Linkages with Golden Tax System Tax and IT advisory assistance Now VAT effective on 1 st of the month First VAT return 1 st end of month First VAT filing 15th of following month 33

36 Contracts If the contract is silent, no VAT can be on-charged to the purchaser 35

37 Major risks or issues contracting and cost saving impacts 1) Existing contracts If the contract is entered into prior to the reforms, and the price is inclusive of BT, will supplier have to absorb the VAT? Or can the supplier pass on the VAT? Leases of tangible movable property entered into prior to the implementation of the VAT pilot program remain subject to BT If the contract allows for entitlement to pass on indirect taxes or turnover taxes, will the supplier be able to pass on the VAT? 2) New contracts If you are the supplier: how do you ensure VAT can be recovered in addition to the contract price? If you are the purchaser: how do you ensure the supplier does not simply add on VAT to the price which already includes BT? how do you ensure the supplier passes on the benefit of the cost savings arising from the removal of BT and the availability of input VAT credits? how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT? 36

38 Major risks or issues registration & invoicing 1) Key registration and invoicing issues to consider Is my business registered as a general VAT taxpayer, or does it need to register now? If not, is my business turnover sufficient to register? Will my business be subject to a monitoring period? What equipment does my business need to purchase to issue special VAT invoices? Do my staff know how to use it? What is the lead time for registering and obtaining approval and equipment for issuing special VAT invoices? Will my business be ready for the implementation of the VAT pilot program? Will my business only deal with other businesses which are registered as general VAT taxpayers? 37

39 Major risks or issues IT systems 1) Key issues to consider Do my IT and accounting systems recognise VAT? What tax codes does my accounting system recognise? Output VAT codes - 0% (exempt), 6% (new VAT rate), 11% (new VAT rate), 13% (foodstuffs and other items) and 17% (general VAT rate); Input VAT rates - 0% (ineligible for VAT credit), 3% (where obtain a special invoice issued by tax authorities for small scale taxpayers), 6% (new VAT rate), 7% (purchase of transportation services from small scale taxpayers by general VAT taxpayers),11% (new VAT rate), 13% (foodstuffs and other items), 17% (general VAT rate), export refund rates How do my systems link in with the golden tax system? 38

40 Major risks or issues supply chain 1) Key supply chain issues to consider Consider the current legal structure what aspects of that structure are superfluous? How could things be rationalised or improved? Assuming no cascading of BT, what aspects of my supply chain can now be removed? Absent BT, is my supply chain most effective from a trade and customs perspective? How does my renewed supply chain impact on transfer pricing? Does my supply chain model consider the concept of unbundling non-dutiable costs from my customs value such as commissions or service fees paid to buying agents for the sourcing of products? 39

41 Major risks or issues cash flow and training 1) Key cashflow impacts Can my business fund an increase in VAT on services (up from 3% or 5%) What are my payment terms for accounts receivable? Do I pay VAT before I receive it? What terms does my business pay accounts payable? Do I get a special VAT invoice at or before I pay the VAT component? Is there a net cashflow deficiency? When borrowing to fund major acquisitions, will I be able to get short-term financing of VAT component? How do the VAT reforms impact on internal budgeting i.e. VAT inclusive or VAT exclusive? 2) Key training considerations Who in my organisation needs to know about these reforms? What about the impact on staff in the finance function? A/c s receivable and a/c s payable function For foreign MNCs, what about head office training? 40

43 Opportunities that the reforms present Consider whether it is preferable to acquire services from businesses subject to the VAT pilot program (for which an input VAT credit may apply) in preference to acquiring services from businesses in other parts of mainland China (for which irrecoverable BT is likely to apply). This preference is only likely to apply for the period until the reforms are expanded across mainland China Deferring the purchase of fixed assets so as to qualify for input VAT credits on fixed assets purchased once the reforms commence. Caution should be exercised before artificially terminating existing contracts or purchase orders, or returning fixed assets recently acquired. Deferring the purchase of non-essential services to ensure that any new services being acquired are subject to VAT. This is especially true in the case of related party services. Importantly though, it may not be sufficient to simply defer payment if there is a contract that provides for an earlier payment date. 42

44 Implementation opportunities practical tips from other countries Significant tax reforms like this are a key management issue, not simply a tax issue Need to start preparing now this includes taxpayers not subject to the pilot program - the reforms are inevitable Obtain a budget to prepare for the reforms Put together a key team project leader + key external advisers Consider the impact on IT systems, accounting systems and processes, pricing, contracts, consumer demand, cashflow management Businesses who provide services are likely to suffer increased strain on cashflow Financial services and real estate are often problematic under VAT hence left until later Transition to a new system always produces winners and losers the key to being a winner is to be prepared 43

46 How KPMG is assisting its clients Preparation Implementation Compliance VAT Prepare report Financial impact assessment Contract reviews Project management Key supplier arrangements Key customer arrangements Preparation of standard procedures Training IT systems Preparation of VAT returns Engagement with tax authorities Application for VAT exemptions or zero rating for exported services Apportionment of input VAT credits Post-implementation health checks 45

47 Contact Lachlan Wolfers Leader, KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21)

48 Contact Roger Di Partner, Tax KPMG China +86 (10)

49 Thank you Presentation by Lachlan Wolfers and Roger Di

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