How to Cope with China’s VAT Reform

As announced by the Chinese Ministry of Finance, starting May 1st, 2016 business tax across all industries in China will be replaced by value-added tax (VAT).

The replacement of business tax with VAT will also be extended to the construction, real estate and finance industries, as well as consumer services such as hospitality, food and beverage, healthcare and entertainment. 11% Value Added Tax will be levied on construction and real estate companies, while 6% will be imposed on finance and consumer service sectors, according to the announcement.

Our Asia Pacific team has set up a brief reference guide for businesses operating in the country – here are a few things you need to consider in order to cope with these changes.

Stop, Collaborate and Review
Before embarking upon any changes, each company should review its tax planning processes and take steps to strengthen invoice management to make sure the new VAT deductions. Other business aspects such as contracts, price and customer care relationships need to be taken into account as well.

Update Makes Perfection
IT systems will most likely need to be upgraded or enhanced in order to cope with the changes of the new applicable rates and invoice issuing processes. Before the new system is applied for all operations, it should be thoroughly tested and end-user training should be conducted.

Don’t Underestimate the Effort
Switching from the BT system to VAT system will pose a great challenge due to the large variety of services and products, which can be subject to different VAT rules and invoice requirements.

Variety is the Spice of Life
Each sector will have to deal with different issues. The real estate and construction sectors, for instance, will work amid VAT deductions, transitional issues and possibly the mismatch of income and costs due to the long lifecycle nature of the industry. For the finance and insurance sectors, common issues will include how to effectively claim input VAT credit and how to pass on output VAT to customers.

Find the Right Partner
By leveraging our 15 years of experience in VAT and withholding tax implementations in China, our team has developed an effective conversion plan/package which can help organizations adapt to the new VAT system within 4-8 weeks. Contact us to discuss sector-specific changes and solutions.