Impact of the Chinese VAT reform on FIE

by Shu on February 26, 2009

in Regulatory Compliance

In Nov. 14, 2008, PRC State Council published the Revised Provisional Regulations on Value-Added Tax (VAT), which became effective on Jan. 1, 2009. This revised regulation transformed the VAT system in China from a production-based system to a consumption-based system. There are five major components of this VAT reform:

1. Input VAT for the current period on fixed assets becomes deductible against the output VAT for the current period.

2. The threshold of annual sales volume for automatic qualification as a general tax payer is reduced to RMB 500,000/yr for general businesses, and RMB 800,000/yr for wholesale and retail businesses.

3. Tax rate for small tax payer is reduced to 3%.

4. VAT Rate for mineral products is increased to 17%. 5. Quarterly filing and payment period is introduced, and grace period for profit-making entities is extended to 15 days.

Among those 5 components, the VAT deduction for fixed assets has the most impact on Foreign Invested Enterprises (FIEs) in China, as the revised regulation supersedes several preferential treatments previously available to some of the FIEs.

As a result, the cost of doing business will probably go down for manufacturers and service providers in the allowed or restricted industries. However, those who claim VAT tax as a small taxpayer or those who pay a business tax, as well as some export-oriented manufacturers might see an increase in their cost of doing business in the near future. For those people, it might be a good time to think about relocating to an export processing zone or free trade zone to lift some of their tax burden.

Joe Zhang

Attorney

Diaz, Reus & Targ LLP

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