CHINA - Various further tax reductions in China and related implementation issues
The State Council of China recently announced that it will implement a series of new tax reductions. Meanwhile, the recent National Tax Work Conference also sent out a positive signal on tax cuts.
On 21 March 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs jointly issued a notice amending relevant regulations on VAT reform with an aim of reducing VAT rates, mainly concentrating on manufacturing industry and small low-profit enterprises, with effect from 1 April 2019, as follows:
- Reduction of VAT rate from 16% to 13% (e.g. manufacturing industry, trading industry);
- Reduction of VAT rate from 10% to 9% (e.g. transport industry, construction industry);
- VAT rate of 6% unchanged (e.g. life service industry), subject to a weighted deduction in future (details not released so far);
- 16% VAT refund on export reduced to 13%; 10% VAT refund on export reduced to 9%;
- Input VAT which could only be retained in the taxpayer’s tax account can now be returned as cash into the taxpayer’s bank account;
In addition to the above, the General Administration of Customs issued the relevant provisions in relation to permitted input VAT deduction on passenger’s domestic transportation vouchers which show the names of passengers (e.g. train, air, bus and boat tickets). With effect from 1 April 2019, input VAT amounts with a tax rate of 9% (e.g. train ticket, air flight ticket) or 3% (e.g. bus, boat) can be deducted from the total tax liability of the taxpayers.
Enterprise income tax rates
Enterprise income tax rates for small low-profit enterprises are significantly lower than the standard Enterprise income tax rate of 25%. For enterprises with taxable income not exceeding CNY 1,000,000, the effective preferential tax rate is 5%; for those with taxable income above CNY 1,000,000 but not exceeding CNY 3,000,000, the effective preferential tax rate is 10%, which comes into force from 1 January 2019. The proposed period is three calendar years.
Impact of the changes
- The total tax burden for taxpayers could be reduced, while taxpayers’ cash flow could be increased;
- There are some risks and uncertainties which should be further discussed during the transition period;
- The Golden Tax system should be upgraded due to the changes of tax rates;
- Consideration should be given to corresponding changes to invoice management controls;
- The rules enabling entities to claim input VAT credit online through the Golden Tax system could be extended to entities who previously did not meet the necessary requirements.
As the Chinese tax system is in a state of flux, and there are substantial system upgrades and uncertainties during the implementation procedure, we would be pleased to assist with all relevant changes arising from this tax reform in China. Please do not hesitate to contact us if you have any further questions.