Post-Business Tax to VAT Reform (“B2V Reform”) in China
Since 1 May 2016, Business Tax has no longer been under China’s indirect tax regime and this signifies the completion of the B2V Reform in China. The VAT chain in China is completed for largely all industries and taxpayers could claim VAT credit for the purchase of tangible goods, immovable properties, intangibles and most services.
Notwithstanding that the Chinese tax authority has issued various tax circulars and notices since the completion of the B2V Reform a year ago to provide further guidance on interpretation of the new tax policy laid down in the B2V Reform, there are still many uncertainties and in particular, relating to cross-border services and new business models e.g. digital economy etc. For example, certain cross-border services like consulting services, research & development services are subject to VAT exemption or zero-rated treatment if the cross-border service is “consumed completely outside China” according to the regulation. However, issues and controversies arise from different interpretation of the phrase “consumed completely outside China” by different local tax authorities, leading to tax risks for taxpayers. It is expected that more tax circulars and regulations will be issued by the Chinese tax authority in order to clarify and provide further guidelines on these uncertain issues. In the absence of further official guidance, taxpayers should manage the potential tax risks properly by negotiating the uncertain issues with the in-charge tax bureaus for a more favourable treatment. Looking ahead, we expect there is still a lot of work to be undertaken by the Chinese tax authority in its VAT reform project such as simplification of VAT rates to keep up with international norm, expansion of the use of electronic VAT invoices, etc.