China: VAT reform and implications for multinational companies

China: VAT reform

Tax reform implemented in China started with a 2012 pilot program in Shanghai that replaced business tax with a value added tax (VAT) in a number of services sectors. Since 2012, the VAT reforms have been progressively rolled out across all cities and provinces in China, and have been expanded to include additional services sectors. The overall plan is to replace business tax with VAT for all services sector in China.

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The change is intended to promote the development of the services sector in China, and will have implications for multinational companies doing business in, or with, China.

For many years, China operated a dual system of indirect taxes, with VAT applicable to the sale and importation of goods (typically at the rate of 17%). By contrast, most services were subject to business tax at rates of either 3% or 5%. However, business tax generally has been regarded as an inefficient turnover tax—one that taxes business at each stage of a supply chain, regardless of the profit or “value added” at each step in the supply chain. By contrast, VAT is a tax collected by business, but effectively intended to be borne by the end-consumer.

 

Read a September 2015 report prepared by the KPMG member firm in China: VAT reforms in China - What it means for multinational companies

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