In a recent edition of the “China Focus” newsletter, the tax experts at Fiducia reported on the trial tax reforms taking place in Shanghai, in which Business Tax (BT) will be replaced by Value added Tax (VAT). The reforms being tested in Shanghai will eventually be rolled out on a national level (Beijing and other provinces are expected to follow in July 2012, the goal is to cover the whole country and all service categories by 2015) and the “China Focus” article explains in great detail how the changes will affect China based enterprises.
So if you own a factory or sourcing office in China, you better get up to speed quickly on this issue. However, most foreign buyers who don’t have a China based office or factory have not paid much attention to the issue. Unfortunately, ignoring the changes could mean missing an opportunity to save big money. I interviewed Hannes Basten in Fiducia’s Shanghai office to help shed some light on this opportunity for foreign buyers. Here are the main points from Hannes.
- Some logistics related services are part of the trial industries and the revised law prescribes for exported services to be free of VAT. That means if an overseas buyer uses such services and the service providers are located in Shanghai there is no tax burden any more (before there was business tax and the service provider needed to pay 3-5% of its turnover to the tax office, depending on the BT rate for that service category). So effectively now the service could be offered~3-5% cheaper than before. To profit from this it is necessary that the service provider applies for export VAT exemption with the tax bureau.
- Should your service provider not have the exemption, you might even face a substantial price increase, as for transportation services the applicable VAT rate is 11% compared to 3% BT before.
- Beyond logistics, the tax break also applies to consulting services. As many service providers like 3rd party product inspection and testing have “consulting” rather than “inspection” on their business license, they may also be part of the pilot program in Shanghai.
Strategies to save money
- Foreign buyers who use logistics services in Shanghai (later all over China) should ask to see the official receipt (called “Fapiao” in Chinese) for services rendered within 2012. If you receive a VAT invoice you know that your service provider is part of the trial reform. If they are charging VAT, they may either be trying to pocket the tax break rather than passing it on to the buyer or they haven´t applied for tax exemption yet. If they have applied for the exemption they will likely get a refund of the tax at a later point. The strategy for buyers should be to carefully monitor the market prices for logistics services to see which companies are passing on the savings.
- Foreign buyers who use inspection services, testing or other consulting services in Shanghai should confirm if their service providers are covered by the tax reforms.
- Consider using a Shanghai based service provider while we wait for the program to roll out nationally.
- If you are using logistics services from other locations in China, check whether that company has a branch in Shanghai and can issue invoices from there to save on tax.
- Would this tax break be applicable to sourcing agents who have “consulting” in their business license?
Yes, this could potentially be the case. If such companies have not been contacted by the tax office, they should check whether they can become part of the trial or not.
- Is Fiducia now passing on the tax break to its clients?
Yes, Fiducia is only charging for those tax items to clients which we have to pay to the tax office ourselves. For all transactions that are now free of tax under the trial our clients 100% profit from the tax breaks.
Trial VAT Reform Report – The Death of Business Tax?
About the author
Interview conducted by CSIC volunteer Mike Bellamy with Thaddaeus Mueller and Hannes Basten of Fiducia-China.com over the months of April and May 2012.