A small businesses’ guide to VAT in China
China’s turnover tax system used to be comprised of a value-added tax (VAT), business tax (BT) and consumption tax (CT). However, starting in 2012, China rolled out a nationwide reform agenda to fold the BT into the VAT system, making the VAT the dominant source of tax revenue. Understanding this nationwide reform is important for international business to operate in China, and to help shed some light on this Vivian Chen, marketing and communications manager at the EU SME Centre, describes what changes have been made to nation’s VAT system.
The CT is levied on specified non-essential or luxury consumer commodities, which results in revenue that is significantly less than what is collected from VAT. From a company point of view, both VAT and CT as turnover taxes are important since they have a significant influence on the market price of company products and services provided.
As the dominant and most important tax category in the turnover tax system, China’s VAT system is not just a pass-through tax: it involves a complicated process based on a credit system that is closely connected with the monitoring of special VAT invoices, i.e. fapiao. It is crucial that small- and medium-sized companies understand how the system works and make the best use of it, not simply when it comes to saving on tax costs but also when avoiding compliance risks.
Scope of VAT
In general, China’s VAT applies to the following taxable activities:
- sale of goods
- importation of goods
- sale of processing, repair and replacement services
- sale of taxable services
- sale of intangible assets
- sale of real estate
According to the provisional VAT regulation, any unit or individual selling goods; providing processing, repair and replacement services; or importing goods within China is subject to VAT. Tax reform created more service categories that are subject to VAT, stating that any unit or individual providing taxable services in China is subject to it.
In the VAT implementation rules, a “unit” refers to enterprises, administrative institutions, businesses, the military, social organisations and other types of organisations. “Individuals” include both individually-owned enterprises and natural persons. VAT taxpayers can be divided into two types: small-scale taxpayers and general taxpayers.
Small-scale VAT taxpayer
A small-scale VAT taxpayer refers to a taxpayer who is unable to keep accounting books according to the standard accounting rules of the State and cannot provide accurate tax materials according to legitimate and valid proofing documents. Small-scale taxpayers with annual taxable sales exceeding the relevant annual sales threshold must register for general taxpayer status. The thresholds are the following:
- Chinese yuan (CNY) 500,000 (approximately euro (EUR) 70,000) if engaged in the production of goods or providing of processing, repair and replacement services;
- CNY 800,000 (approximately EUR 100,000) if engaged in the retailing of goods; or
- CNY 5,000,000 (approximately EUR 700,000) for taxable services.
General VAT taxpayer
Taxpayers with annual VAT sales above the threshold of a small-scale VAT taxpayer must register as a general VAT taxpayer. Newly established enterprises and other enterprises whose annual taxable sales are not more than the aforementioned thresholds may voluntarily apply for general taxpayer status. A general VAT taxpayer enjoys input VAT credit for purchasing goods or services.
There are two kinds of VAT rates: tax rates and levy rates. For small-scale taxpayers, the VAT levy rate of three per cent is applicable. For the general taxpayer, VAT tax rates may be 17 per cent, 13 per cent, 11 per cent, six per cent or even zero per cent, depending on the nature of the goods or services involved. The VAT levy rate for general taxpayers is three per cent or five per cent.
China VAT invoice system
In China, all business transactions are required by law to be recorded on an official receipt (or fapiao). Contrary to other countries, fapiaos are more than just ordinary receipts. Fapiaos are distributed and administered by tax authorities, and taxpayers are required to purchase the fapiaos they need from the tax authorities according to the scope of their business. Fapiaos are physical paper invoices printed with a special printer by specially trained employees that have achieved ‘general taxpayer’ status.
When an enterprise is incorporated, it needs to state what activities it intends to perform on its business licence and only operate in this scope. The fapiao system is one means to enforce this, as the enterprise cannot issue fapiao for activities that fall outside their purview.
VAT fapiao can be sorted into two categories:
- Special VAT fapiao is the most commonly inputted VAT voucher for any VAT deduction issued by a general VAT taxpayer to another business.
- General VAT fapiao is used for all other instances, including sales to small-scale taxpayers and consumers, VAT-covered transactions done by small-scale taxpayers or sales of tax-free goods and services.
The EU SME Centre in Beijing provides a comprehensive range of hands-on support services to European SMEs, getting them ready to do business in China.
Our team of experts provides advice and support in four areas: business development, law, standards and conformity and human resources. Collaborating with external experts worldwide, the centre converts valuable knowledge and experience into practical business tools and services easily accessible online. From first-line advice to in-depth technical solutions, we offer services through Knowledge Centre, Advice Centre, Training Centre, SME Advocacy Platform and Hot-Desks.
The centre is funded by the EU and implemented by a consortium of six partners – the China-Britain Business Council, the Benelux Chamber of Commerce, the China-Italy Chamber of Commerce, the French Chamber of Commerce in China, the EUROCHAMBRES, and the European Union Chamber of Commerce in China.
To learn more about the Centre, visit website www.eusmecentre.org.cn