Highlights of changes in draft VAT law

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On 27 November 2019, China released its Value-added Tax Law of People’s Republic of China (consultation draft) for the legislation process of the VAT regime. The public comment period for the draft VAT law closed on 26 December 2019.

The draft VAT law generally provides an underpinning for the current VAT Interim Regulations while incorporating the VAT reforms commenced in 2012. Based on experience with other taxes, it is likely that the VAT law may be promulgated and submitted for approval by the National People’s Congress in 2020.

There are important differences between the current VAT regime and the draft VAT law to explain so that companies can manage their expectations regarding upcoming changes.

Major changes

Compared with the current VAT regime, the draft VAT law will bring major changes in the following aspects:

Taxation threshold. The draft VAT law directly raises the threshold of taxation to RMB300,000 (US$43,000) per quarter of sales, regardless of the taxpayer’s taxation period. The amount is the same as that in the current VAT regime, which exempts small-scale taxpayers from VAT if their monthly sales are below RMB100,000 per month (or RMB300,000 per quarter).

Companies with sales below the taxable threshold are not taxpayers specified in the VAT law. However, if a company fails to meet the threshold of taxation, it can voluntarily register and pay VAT.

Meanwhile, the draft VAT law omits all references to small-scale taxpayers, which might mean that the concept of small-scale taxpayers has been terminated.

Taxable activities. The draft VAT law defines five categories of taxable activities – sale of goods, services, intangibles, immoveable property and financial products – by including “processing, repair and installation services” in the “services” category and separating “financial products” from “services” as a category.

In determining whether a service or intangibles sale has occurred in China, whether the seller is a company in China, or the service or intangible is consumed in China, is taken into consideration. This definition of taxable activity is narrower than that given by the current regime, where either the buyer or seller of the service or intangibles is in China, when excluding activities totally provided outside China. However, the definition of “consumed in China” is unclear and needs further clarification.

Deemed sales. One beneficial signal for companies in the draft VAT law is that scope of deemed sales does not cover provision of service without consideration and provision of goods without consideration for public welfare.

For the provision of service without consideration, in practice, it is difficult for the tax authority to discover and determine when a company has provided a service to another company without consideration. However, companies still face a risk if they provide a service without consideration, which is now eliminated by the draft VAT Law.

Another piece of good news for companies is that, if it is for public welfare, a company’s transfer of goods without consideration will not be deemed as a sale. This will benefit companies when making donations to public welfare funds.

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