VAT in China is a significant component of the tax system in China and plays a crucial role in the country’s revenue generation. VAT is a tax levied on the value added to goods and services during the production process. The Chinese government introduced VAT in the early 1990s as a way to broaden the tax base and improve the efficiency of tax collection.

China levies Value-Added Tax (VAT) on a wide array of products and services, ranging from the importation of goods to financial services such as deposit account interest. This tax system is only applicable in mainland China, with the Special Administrative Regions of Hong Kong and Macau excluded. Exports are exempt from VAT, which could be seen as a way to encourage international trade. Unusually, residential property sales between consumers are also subject to VAT taxation, unlike in many other countries where this type of transaction is not subject to taxes.

Companies registered in China are required to comply with VAT compliances, both domestically and internationally. Companies must submit VAT returns on a regular basis and keep detailed records of their VAT payments and receivables. Furthermore, companies should also be aware of any changes made to VAT regulations and make sure their operations remain compliant.

VAT in China: Import structure

When it comes to imports, the VAT system works by requiring importers to pay taxes based on the cost of their imported goods plus any additional cost associated with said goods. This includes transportation fees, administrative charges, packaging costs, and any other miscellaneous fees related to the imported products. The amount of VAT that needs to be paid will usually depend on the product’s type and its intended use or purpose. Furthermore, all businesses that purchase or obtain goods or services within China must also pay VAT in order for them to be able to operate legally.

In terms of financial services being liable for taxation under the Value-Added Tax system in China, these include deposits made into savings accounts and interest payments made on those deposits as well as other types of financial products such as stocks and bonds. The taxation for these services depends on how long they have been held by the taxpayer and what kind of returns were obtained during that time period.

VAT: TYPES

In China, there are two types of VAT taxpayers: General Taxpayers and Small-Scale Taxpayers. General Taxpayers are large-scale enterprises with an annual taxable income of more than RMB 5 million and are subject to a VAT rate of 17%. On the other hand, Small-Scale Taxpayers are businesses with an annual taxable income of less than RMB 5 million and are subject to a lower VAT rate of 3% or 6%.

General Taxpayers are responsible for calculating, reporting, and paying VAT on their own. They are required to keep detailed records of their taxable transactions, including invoices and receipts, to facilitate the calculation of VAT. Furthermore, General Taxpayers are subject to periodic tax audits, and non-compliance with VAT regulations can result in significant penalties and fines.

Small-Scale Taxpayers, on the other hand, are eligible for a simplified VAT calculation and reporting process. They are also eligible for preferential tax treatment, which can help to reduce the overall tax burden on small businesses. However, Small-Scale Taxpayers must still comply with the relevant VAT regulations and ensure that they accurately report and pay VAT on time.

Obligations and regulations

It is important for businesses operating in China to understand their VAT obligations and ensure compliance with the relevant regulations. This includes keeping accurate records of taxable transactions, calculating VAT correctly, and reporting and paying VAT in a timely manner.

The VAT rate for general goods and services is 17%, while there are reduced VAT rates available for some types of goods such as food, medical equipment, books, and newspapers (6%). There are also even lower VAT rates applied to some specific items – for example, electricity is subject to a 3% VAT rate. In addition to standard VAT rates, zero-rated VAT applies to exports from China, as well as some goods and services that are VAT exempt.

Taxpayers can claim VAT deductions on taxes paid for purchases, provided the VAT has been correctly invoiced and the purchased goods or services have not been used to produce non-taxable income. Businesses must also comply with specific VAT regulations when invoicing customers, filing VAT returns, and paying VAT.

It is important to understand China’s VAT regulations in order to ensure compliance with local laws and avoid penalties or other fines. Businesses operating in China should seek professional advice from a qualified accountant or tax advisor before engaging in any financial activities related to VAT in the country. This will help ensure smooth operations and compliance with all applicable laws and regulations.

Should you register for Chinese VAT?

Businesses and individuals providing taxable goods and related processing services or who imports into mainland China are liable to VAT.  There are varying turnover thresholds to determine which category an enterprise is categorized as (up to RMB 800,000 per annum is the cut-off), and reporting requirements are different.

Typical situations requiring a Chinese VAT registration include:

·  The importation of goods into China;

·  Where goods are manufactured within China;

·  If goods are reworked or reprocessed in China;

·  Installations in China; and

·  Certain exports of goods from China.

Recent Changes

VAT policies in China have been undergoing significant transformation since 2018, and the country has set a target to fully transition to VAT by 2023. VAT is a type of indirect tax that applies to goods and services, replacing the business tax system that had been used many years prior. This shift has brought about far-reaching implications for businesses operating in China, as VAT is calculated according to value added at each stage of production or distribution. It also affects cross-border trade significantly, as VAT must be calculated based on different country’s rules and regulations.

Businesses in China must now ensure compliance with VAT policy changes as well as stay up-to-date with new VAT legislation being introduced over the next few years. They must also understand the VAT implications of their commercial activities and be prepared to take action to mitigate any potential VAT risks in a timely manner.

VAT policies in China are becoming increasingly complex and businesses will need to stay ahead of the curve if they want to remain competitive. With 2023 fast approaching, now is the time for companies operating in China to ensure that they have a strong understanding of VAT rules and regulations so that they can make informed decisions about their VAT strategies.

VAT for Foreign entities in China

Value-Added Tax (VAT) is a tax levied on the value added to goods and services during the production process in China. It is a significant source of revenue for the Chinese government and plays an important role in the country’s tax system. Foreign entities operating in China must comply with VAT regulations to ensure that they are operating legally and efficiently.

Foreign entities operating in China are generally classified as General Taxpayers and are subject to the standard VAT rate of 17%. They are responsible for calculating, reporting, and paying VAT on their own and must keep accurate records of taxable transactions to facilitate the calculation of VAT.

Foreign entities must also ensure that they comply with the relevant VAT regulations, including reporting and paying VAT on time. Failure to comply with VAT regulations can result in significant penalties and fines. It is recommended that foreign entities seek professional advice to ensure that they are fully compliant with VAT regulations.

Recent changes in policies

In recent years, there have been several changes to the Value-Added Tax (VAT) system in China aimed at simplifying the tax system and promoting economic growth. Some of the most notable changes include:

Expansion of the VAT Pilot Program: In 2012, the Chinese government introduced a VAT pilot program to replace the previous Business Tax (BT) system. The program has been gradually expanded to cover more industries, and as of January 1, 2019, all industries in China are now subject to VAT.

Simplification of the VAT Calculation Process: The Chinese government has introduced a simplified VAT calculation method for small and micro-enterprises to reduce their tax burden. The new method uses a fixed rate to calculate VAT, which is simpler and more straightforward than the traditional VAT calculation method.

Reduction of VAT Rates: The Chinese government has reduced the standard VAT rate from 17% to 16% and the reduced VAT rate from 11% to 10%, with the aim of boosting economic growth and reducing the tax burden on businesses.

Electronic Invoicing System: In 2018, the Chinese government introduced a nationwide electronic invoicing system, which has greatly improved the efficiency and accuracy of VAT reporting and payment.

These changes to the VAT system in China have made it simpler and more efficient for businesses to comply with VAT regulations and operate smoothly. However, it is important for businesses to stay up to date with the latest changes and ensure that they are fully compliant with VAT regulations.

The VAT system in China has simplified the tax system and reduced the tax burden on businesses. Foreign entities operating in China must stay up to date with the latest changes and ensure that they are fully compliant with VAT regulations to avoid significant penalties and fines.

In response to COVID-19, there are various VAT incentives. For example, from 1 March 2020 to 31 March 2022, the VAT rate for small-scale VAT payers is reduced from 3% to 1%; and from 1 April 2022 to 31 December 2022, VAT is exempted for small-scale VAT payers.

Overall

In conclusion, the VAT system in China is an important part of the country’s tax system and must be fully understood and complied with by foreign entities operating in the country. The recent changes to the VAT system have made it simpler and more efficient for businesses to operate, but it is important to stay up to date with the latest changes and ensure full compliance.

As a foreign entity operating in China, it is essential to have a thorough understanding of the VAT system and to ensure that you are fully compliant with all relevant regulations. This can be a complex and time-consuming process, but the team at FDI China is here to help.

At FDI China, our experienced professionals can assist you with all the necessary steps to ensure that you are fully compliant with VAT regulations, including calculating, reporting, and paying VAT accurately and on time. Whether you need help with compliance or have questions about the VAT system in China, we are here to help.

So, if you are a foreign entity operating in China and need assistance with VAT compliance, don’t hesitate to contact us. We are here to help you navigate the complexities of the VAT system and ensure that you are fully compliant.