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China fully expands VAT reform to all industries

China has expanded its value-added tax (VAT) reform pilot program to all industries including construction, real estate, finance and consumer services. The Ministry of Finance and the State Administration of Taxation (SAT) said that from May 1, 11% VAT will be levied on construction and real estate companies, while 6% will be imposed on finance and consumer services. Tangible goods have been under the VAT regime for some time, whereas services have been subject to business tax, which is based on the value of a firm's sales. This system results in a tax on tax. VAT avoids this by being applied to the value added at each link in the production chain. The State Council estimated that this will ease more than Rmb500 billion ($76.9 billion) in tax bills this year. The SAT first launched the VAT pilot program in Shanghai at the beginning of 2012. It then clarified in February 2013 certain complications that arose surrounding withholding tax and cross-border royalties. And it has since released various rules regarding licensing, indirect transfers and other aspects that impact Enterprise Income Tax payments. Each step was met with some controversy or confusion, but the SAT's moves over the past few years show that China is taking a cautious and gradual approach to streamlining its taxation regime.

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