Tax & Accounting Blog

Final phase of VAT Pilot Program in China

Blog, Indirect Tax, ONESOURCE, Reuters Tax & Accounting News March 21, 2016

Stagnant economies all over the globe have been turning to tax reform in hopes of attracting investment, boosting revenue, and consumer spending. Thus far China has been no exception, but they are taking their reform to rather unprecedented levels and applying it to unexpected corners of the economy. In 2012, China did away with its Business Tax in favor of VAT, which has been a fairly common adaptation of the last few years. They have also made decided cuts to consumption taxes and have begun to offer the same rates and rights to international entities in a gesture to court foreign dollars to China. The most radical move is the announcement that in early 2106, China will begin to levy VAT on financial services.

On March 5th the Chinese government announced that their projected tax reform plan will be complete as of May 1st 2016. The final four industries still untouched by Value Added Tax (VAT), Financial Services, Construction, Real Estate, and Consumer Services, will fully transition from Business Tax to being subject to VAT. China’s lackluster economic performance during their last 5-year plan cycle has attached the urgency of a military command to these reforms so they will happen and happen fast, but how is still quite foggy. The final four industries are highly regulated and operate under extremely complex and opaque conditions, which could have a neutralizing affect on the purpose of the intended rapid reforms. The governmental order to alleviate the corporate tax burden is meant to stimulate foreign investment and cast China as a modern player and a far less complicated place to do business than it once was. Meanwhile, China’s rapidly growing deficit will mandate more swift reform, lightening the consumer tax burden, and ultimately, converting their production economy to one focused increasingly on services. At the moment the details could not be more unclear, but further announcements and clarifications are expected from the Ministry of Finance within a few weeks.