Update on China VAT implementation

Transcription

1 Update on China VAT implementation KPMG Karmen Yeung 21 August 2012

2 Agenda Setting the scene Affected businesses Major issues or risk areas How KPMG can help you?

3 Pre-reforms Business Tax VAT Consumption Tax 2

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

5 Impact of the VAT Reforms in Shanghai Impact of VAT reform to Shanghai pilot companies 10.9% in Tax Burden Tax ( million) 1,210 7,730 8, % in Tax Burden Pilot companies having a decrease in tax burden Pilot companies having an increase in tax burden Small-scale Taxpayer General Taxpayer VAT BT (if no reform) Source : The statistics for the first five months of 2012 published by Shanghai Tax Bureau 4

6 Indirect tax reforms 1 Jan 2012 Shanghai 1 Sept 2012 Beijing Chongqing BEIJING Beijing Beijing Tianjin Tianjin Tianjin Shanghai Shanghai Anhui Shanghai Zhejiang Hubei Jiangsu Jiangsu Fujian Jiangsu Xiamen Guangdong Shenzhen Shenzhen 1 Oct Nov Dec Jiangsu and Anhui Fujian and Guangdong Tianjin, Zhejiang and Hubei The remaining cities and provinces in China Expansion by scope likely in 2013: Financial Services Real Estate & Construction Entertainment Post & Telecoms 5

7 Estimated impact on local tax revenue Likely effect on local tax revenue for the first year of implementation of VAT reform Shanghai Beijing Decrease Approx. RMB 10 Billion [1] Approx. RMB 7 Billion [2] If the VAT reform is extended to nation-wide, the resulted tax revenue reduction is estimated to be RMB100 Billion [3] Source : [1] The Development Research Centre of Shanghai Municipal People s Government [2] Beijing Tax Bureau / Finance Bureau [3] State Administration of Taxation 6

8 Agenda Setting the scene Affected businesses Major issues or risk areas How KPMG can help you?

9 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% 8

10 VAT pilot scheme scope of services Industry Scope Leasing of tangible movable property Includes finance leases and operating leases Transportation services R&D and technical services Includes land transportation services, water transportation services, air transportation services, pipelines transportation services Includes R&D services, technology transfer services, technical consulting services, energy contract management, engineering, reconnaissance and exploration services IT related services Includes production, collection, processing, storage, transportation and distribution of information, including software services, circuit design, information systems 9

11 VAT pilot scheme scope of services Industry Cultural & creative services Scope Includes licensing or transfer of trademarks, patents, copyrights etc, and transfer of goodwill, design services, advertising services, convention and exhibition services Logistics and ancillary services Consulting services Includes aviation services, port services, freight and passenger station services salvage rescue services, freight forwarding services, customs clearance services, warehousing services, material handling services Includes internal management services, finance, tax, operations and process management 10

12 Registration Compulsory RMB 5 million (US$800,000) annual sales income Optional 11

13 Who in China will be affected? Location of supplier Location of services VAT or BT In Pilot locations In Pilot locations VAT In Pilot locations Elsewhere in mainland China BT, but credit allowed against VAT payable (very limited application in practice) Elsewhere in mainland China In Pilot locations BT Elsewhere in mainland China Elsewhere in mainland China BT Rule of thumb: If you paid BT in Pilot locations previously, and those same services are now within the scope of the pilot program, then you pay VAT in Pilot locations. It does not matter where the customer is located in mainland China. 12

14 Who in overseas will be affected? Location of supplier Location of recipient / place of consumption VAT treatment In Pilot locations Outside of mainland China Zero rating or exempt Outside of mainland China In Pilot locations If no agent, recipient should withhold and pay VAT on behalf of overseas service providers and may claim input VAT credit subject to documentary requirements Outside of mainland China Outside of mainland China Services consumed wholly outside of mainland China Leased goods used entirely outside of mainland China Not subject to VAT Not subject to VAT 13

15 Exported Services Circular 131 Example VAT VAT Zerorated VAT exemption PRC company provides R&D and design services to overseas companies. PRC company provides logistic services to overseas companies PRC company provides exhibition services to overseas companies (exhibition is held in overseas) PRC company provides warehousing services to overseas companies (warehouse located inside China) PRC company provides warehousing services to overseas companies (warehouse located outside China) 14

16 Procedures for claiming exemption for exported services The majority of tax authorities in Shanghai have not yet published the documentation/approval procedures for claiming exemption from VAT In the interim, taxpayers may need to pay VAT on exported services, depending on the different local practices. A refund will be given when the procedures are published and satisfied The Changning District Tax Bureau in Shanghai have issued procedures for taxpayers located in its districts. 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 15

17 VAT implications on cross border services Exports: Output VAT Creditable input VAT Zero rating No Yes Imports: Exempt No No Identify and track input VAT credits and apportion any expenses which have a dual purpose or function Output VAT Creditable input VAT Agent or purchaser Withholding of VAT Yes, if general VAT taxpayer If the purchaser can claim an input VAT credit, then the overseas supplier should seek to gross up the price for VAT purposes 16

18 Agenda Setting the scene Affected businesses Major issues or risk areas How KPMG can help you?

19 Contracting and cost saving impacts 1) Existing contracts Adaptability to the change of BT to VAT? 2) New contracts If you are the supplier: possibility to pass on VAT to customers? If you are the purchaser: possibility to share the tax savings with suppliers? how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT? 23

20 Registration & invoicing Key registration and invoicing issues to consider General VAT taxpayer or small scale taxpayer? If general VAT taxpayer, does it need to register now? 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? 24

21 IT systems Key issues to consider Do my IT and accounting systems recognise VAT? What tax codes does my accounting system recognise? How do my systems link in with the golden tax system? 25

22 Supply chain Key supply chain issues to consider Consider current the 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 or added? 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? 26

23 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 the 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? 27

24 Opportunities that the reforms present Consider whether it is preferable to acquire services from other businesses in Pilot locations (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. 28

25 Implementation 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 likely to be left until later Transition to a new system always produces winners and losers the key to being a winner is to be prepared 29

26 Agenda Setting the scene Affected businesses Major issues or risk areas How KPMG can help you?

27 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 31

28 Thank you Karmen Yeung Partner China Tax KPMG Hong Kong, China Tel:

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