On 16 November 2011, the PRC State Administration of Taxation (SAT) and the Ministry of Finance ("MoF") jointly issued a notice regarding their general plan of replacing the business tax ("BT") system with the VAT system ("the Plan"). In accordance with the Plan, details of the Shanghai Pilot Program are provided under the Tax Circular Caishui [2011] No.111 ("Circular 111").
The author decided to offer to sneak preview of what this tax reform is all about. Below is an article written by Charlie Sun (Head of Tax PAG, CMS China) on this regard.
In China, there are two major kinds of turnover taxes, i.e. Value-Added Tax (VAT) and BT. They cover different scopes of transactions. The VAT system mainly covers import and sales of movable/tangible goods, while the BT system covers services, transfer of intangibles and immovable properties. A few exceptions are processing, repairing and maintenance services which are covered by the VAT system, not the BT system. The BT system has been widely criticized for not having the input-output credit mechanism which is adopted in the VAT system. Such feature of the BT system means that BT costs are not recoverable by either party. Further, in case of subcontracting of services, the portion of the subcontracted service value will be taxed twice for BT purposes (once at the main-contractor and once at the subcontractor). In addition, due to the different tax rates and systems, the simultaneous operation of both VAT and BT systems has caused various administrative problems for both taxpayers and tax authorities. To solve the above problems and to ultimately eliminate the BT system, the PRC government has recently taken actions to launch a pilot tax reform starting from 1 January 2012. For the time being, this reform is limited to Shanghai. However, ultimately, it is expected to be extended to all over China in the future.
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