In the first quarter of 2017, China introduced a range of tax reduction measures to facilitate the development of the Chinese economy. Further planned tax reduction measures were set out in the Report on the Work of the Government by Premier Li at an executive meeting of the State Council held on 19 April 2017. These include, inter alia:
(i). Reduction of VAT brackets for general VAT taxpayers from four to three;
(ii). Increase to research and development expense super deduction for science and technology-related small and medium enterprises;
(iii). Preferential tax treatment for premiums paid to eligible commercial health insurance providers shall be applied on a nationwide basis.
These tax reduction measures may expect to further drive growth and innovation.
In the first quarter of 2017, China introduced a range of tax reduction measures to facilitate the development of the Chinese economy. Further planned tax reduction measures were set out in the Report on the Work of the Government by Premier Li at an executive meeting of the State Council held on 19 April 2017. These include:
Following Premier Li’s speech, the MOF and SAT jointly issued several implementing circulars to provide detailed clarifications on the measures. This China Tax Alert focuses on the measures on VAT rate simplification. KPMG China have also issued specific China Tax Alerts on the improved R&D expense “bonus deduction” (see China Tax Alert, Issue 14), the enhanced tax incentive treatment for VC enterprises (see China Tax Alert, Issue 15) and IIT preferential treatment for health insurance products (see China Tax Alert, Issue 17), at III, IV and V above.
Circular 37 clarifies that the number of VAT brackets will be reduced from four to three from 1 July 2017 onwards and that the 13% rate will be abolished. It also clarifies the following:
In addition, Circular 37 also adjusts export tax refund rates, subject to a transitional period. The export tax refund rate will still be 13%, where: (i). enterprises engaging in foreign trade business export goods set out in Appendix of Circular 37 before 31 August 2017, where these goods were subject to VAT at 13% at the time of purchase; or (ii). manufacturers export goods set out in Appendix of Circular 37.
The VAT rate simplification should generally lower taxpayer tax burdens, reduce compliance costs and limit tax disputes. The special transitional policy set out for the processing enterprises (i.e. those purchasing agricultural products, processing them, and selling them on as products subject to VAT at 17%), which allows for continued preferential claims of input credit, should ensure the farming sector is not impacted.
It should be noted though that certain complexities enter the rules due to the challenges of reconciling the new Circular 37 rules with the deeming provisions for processing enterprises in the Provisional Regulations on VAT1.
As such, so long as the processing activity can be tracked separately from other activities of the taxpayer, and regardless of which of the three invoicing situations is in point, a deemed input VAT credit at 13% may be claimed.
The simplification of the VAT rate structure makes the Chinese VAT system more economically neutral. Many countries with a VAT (or equivalent GST) use a single or two-bracket VAT rate structure for all goods and services. In the longer term China’s VAT rate structure might be anticipated to be further simplified.
1 Revised in February 2016, see http://www.gov.cn/gongbao/content/2016/content_5139450.html.