China: Impact Of China´s VAT Reform On Foreign-Invested Enterprises

Last Updated: 8 December 2008
Article by Fuli Cao

On November 10, 2008, the State Council of China approved the amendments to the Provisional Regulations of the PRC on Value Added Tax ("Amended VAT Regulations"). The key change is a shift from a production-based VAT regime to a consumption-based VAT regime. Under the current regime, the recovery of input VAT incurred on the purchase of fixed assets is disallowed. The Amended VAT Regulations will allow general VAT payers to recover input VAT incurred on the purchase of certain fixed assets.

Application Scope

The new VAT treatment of fixed assets applies to equipment newly purchased on or after January 1, 2009. Equipment for this purpose includes machines, machinery, means of transportation, and other equipment and tools related to production and operation. However, input VAT recovery is disallowed for the purchase of cars, motorcycles, and yachts that are subject to consumption tax and could be used for private purposes. The input VAT recovery also does not apply to immovable properties such as buildings and structures.

Cancellation of VAT Exemption on Import and VAT Refund on Domestic Purchase

Currently, VAT exemption on the importing of equipment and VAT refunds on the purchase of domestically produced equipment are available to qualified enterprises, especially to certain foreign-invested enterprises. Foreign investments in China are classified as "encouraged," "permitted," "restricted," and "prohibited" under the foreign investment catalogue. If a foreign-invested enterprise is classified as "encouraged," the enterprise is eligible for VAT exemption on imported equipment for its own use up to its approved amount of total investment, unless the imported item is on a list of nonexempted items. If an "encouraged" foreign-invested enterprise purchases equipment produced domestically within China, the enterprise can claim a VAT refund for the input VAT incurred on the purchase of such equipment. This preferential VAT policy will be abolished on January 1, 2009.

Impact on Foreign-Invested Enterprises

Because of the different classifications and business nature of foreign investments in China, the VAT reform may have different impacts on various foreign-invested enterprises.

General VAT Payers That Currently Do Not Enjoy VAT Preferential Treatment. Foreign-invested enterprises in "permitted" and "restricted" categories currently do not enjoy VAT exemption on the importing of equipment or VAT refunds on the purchase of domestically produced equipment. Under the current regime, those enterprises cannot recover input VAT incurred on equipment purchases; such input VAT will be capitalized in the asset cost for depreciation for corporate income tax purposes. If those enterprises are general VAT payers, the Amended VAT Regulations will allow them to credit input VAT on qualified equipment purchases (both imported and domestic). The regular VAT rate is 17 percent. The benefit as a result of the VAT reform for those enterprises is an approximate 12.75 percent reduction in the cost of equipment purchase (i.e., a 17 percent VAT recovery net of corporate income tax benefits at 25 percent).

Business Tax Payers That Are Not Eligible for VAT Exemption. VAT in China applies to the importing of goods into China, the transfer of goods within China, and the provision of processing and repair services in China. Business tax is imposed on the provision of services (other than processing and repair services) and the transfer of immovable properties and intangibles. If an enterprise is a business tax payer and not a VAT payer, it is charged for input VAT on the purchase of goods; it cannot recover input VAT because it is liable for business tax (not VAT) on its revenue derived from the provision of services or the transfer of immovable property and intangibles. The VAT reform does not directly affect those enterprises. Input VAT recovery will continue to be disallowed for them. Enterprises covered include banks, insurance companies, telecommunication companies, and many other service companies, real estate developers, and construction companies.

General VAT Payers in the "Encouraged" Category of Foreign Investment. Under the current regime, these foreign-invested enterprises are entitled to VAT exemption on imports of equipment and VAT refunds for domestic purchases of equipment subject to certain limitations. On and after January 1, 2009, such VAT exemptions and refunds will no longer be available. This means that these enterprises need to pay VAT on the importing of equipment and then recover the input VAT at the time they sell their own products. Similarly, the input VAT incurring on the purchase of domestic equipment will no longer be refundable, only creditable. Newly established manufacturers will only be able to recover the input VAT after they start production. Furthermore, if manufacturers do not have sufficient domestic sales (i.e., they export all or most products), it may take a long time to offset the excess input VAT. As such, the VAT reform may adversely affect the cash flow of enterprises in this category.

Business Tax Payers in the "Encouraged" Category of Foreign Investment. Some R&D companies may derive income primarily from service fees or royalties that are subject to business tax rather than VAT. Some of those foreign-invested enterprises are classified in the "encouraged" category of foreign investment and currently enjoy VAT exemption on the importing of equipment and VAT refunds on the purchase of domestic equipment. On and after January 1, 2009, such VAT exemptions and refunds will be no longer available. These companies cannot recover input VAT because they are not VAT payers. The VAT reform will increase the cost of fixed-asset investments for these foreign-invested enterprises. As the Chinese government encourages R&D activities, it is not clear whether relief will be given to these enterprises.

Other Changes

There are two types of VAT payers in China. General VAT payers pay VAT at the regular rate (generally 17 percent) and can recover input VAT. Small-scale VAT payers are typically commercial enterprises with annual sales of less than RMB1.8 million and other enterprises with annual sales of less than RMB1 million. Small-scale VAT payers pay VAT on sales at reduced rates and cannot recover input VAT. Currently, the VAT collection rates for the small-scale commercial enterprises and other enterprises are four percent and six percent respectively. Under the Amended VAT Regulations, the VAT rate for all small-scale VAT payers will be reduced to three percent.

Mineral products have been subject to a reduced VAT rate of 13 percent. On and after January 1, 2009, the VAT rate of mineral products will be shifted back to the standard rate of 17 percent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions