[Imports Management] Value Added Tax Reform in China

Seeking to perfect the country’s value added tax (VAT) system and to maintain the smooth development of China’s economy, the State Council has decided to implement a transformation and reform of the VAT, effective January 1, 2009.

VAT reform will take place in all areas and industries of the nation. It allows enterprises to deduct the VAT for new purchasing equipment; cancel policies related to the Importing Equipment Exempt from Taxation and Tax Refund of VAT to Foreign-funded Enterprises for Their Purchase of Home Equipment programmes; and reduce the VAT rate for small taxpayers to 3 percent while resuming the VAT tax rate of 17 percent for mineral products.

The Ministry of Finance, State Administration of Taxation and General Administration of Customs of the Peoples’ Republic of China jointly issued a regulation, which says the former policies of Importing Equipment Exempt from Taxation and Tax Refund of VAT will still be relied upon for projects that have issued Confirmation Letters before November 10, 2008, with their imported equipment, technologies, fittings and spare parts claimed before June 30, 2009; projects that purchase domestic equipment can still qualify for a VAT tax refund policy before June 30, 2009, if they got a Confirmation Letter before November 9, 2008, and provided records to supervising taxation offices before December 31, 2008.

The transformation and reform of the VAT will have varying effects on industries. The VAT rate for small businesses and the self-employed that fell into the small taxpayer category was reduced to a universal 3 percent from 6 percent for industrial firms and to 4 percent for commercial companies, while the VAT rate for mineral products rose back to 17 percent from 13 percent.

The reform enables companies to get tax deductions for spending on fixed assets. Therefore, industries with more newly purchased equipment will see more benefit, including the rubber products, print, timber and wood products, metal products, food, industry, industry, electronic power and heating provider and non-mental mineral product industries. The ten specific industries which will benefit most from this reform include the oil refining; metal wire and products; paper-making; ceramic; wood/timber processing and bamboo, rattan, palm fibre and straw product industries; non-biological product; dairy product; electricity, steam and hot-water producing and providing industries; the cotton textile; aerospace and aviation industries. Foreign trade companies with solely export businesses and companies in non-VAT-taxable industries such as architecture and service industries will not benefit from the reform.