An Overview of the New Changes in China’s Tax law

By juli 1, 2019No Comments

An Overview of the New Changes in China’s Tax law

In order to encourage the development of certain industries, tax reform in China has continued by a publication of a host of tax incentives in begin 2019, ranging from adjustment of value-added tax (“VAT”) rate to reduction of corporate income tax (“CIT”). This article highlights the changes that may directly affect doing business in China by foreign taxpayers.

  1. New VAT policies

The Ministry of Finance, State Taxation Administration, and the General Administration of Customs have jointly on April 1, 2019, released several new policies on VAT to fundamentally reshape the country’s VAT regime, aiming to encourage economic growth in certain industries by lowering VAT rates and increasing VAT credits. The latest changes mark the final stages of China’s overhaul of its VAT system.

Three major changes to the new VAT policies are highlighted hereinafter.

(1) Reducing VAT rate

Starting from April 1, 2019, Chinese taxpayers who were originally subject to VAT rates of 16% (manufacture industry) and 10% (real estate industry; telecommunication industry; agricultural industry) on import and export goods, will now be subject to an reduced 13% and 9 % respectively, 6% VAT rates remain the same. [1]

For goods purchased by overseas travelers, the departure tax refund rate has now been adjusted to 11% and 8% from 13% and 9% respectively.

(2) Changing the redemption of input VAT credit for real estate and projects under construction

From April 1, 2019, the company registered as a general VAT taxpayer in China can claim the full input VAT credit (meaning added cash flow into the company) all at once for purchases of real estate and construction services. Previously, it was stipulated that the input VAT credits for purchases of real estate and construction services are claimed over a two-year period.

(3) Allowing input VAT credits for excess input VAT credits

According to old rules, when a company’s input VAT exceeds the output VAT, meaning the VAT charged and collected from customers, the excess VAT will be carried forward to offset the output VAT in the next tax period.

Under the new policy, companies are able to enjoy a refund on their excess input VAT under paragraph 8 of the policy,[2] if the following criteria are met:

  • If the overdraft VAT for each of the six consecutive months (two consecutive quarters if taxed quarterly) is not less than RMB 500,000;
  • The taxation credit is rated as A or B;
  • They have not received refunds on their levy;
  • There have been no penalties by tax authorities 36 months before its claim for VAT refund; and
  • They have not committed VAT fraud in the last 36 months prior to claim.
  1. New CIT

A new corporate income tax (CIT) policy was released in order to encourage enterprises to engage in pollution prevention and control which is aligned with the government’s environmental goals.

The policy was jointly announced by the Ministry of Finance, State Administration of Taxation, National Development and Reform Commission, and Ministry of Ecology and Environment on April 13 in The Announcement on the Third Party Enterprise Income Tax Policy Concerning Pollution Prevention and Control.[3] It will be implemented retroactively from January 1, 2019 until December 31, 2021.

Under Article 5 of the incentive, a reduced CIT rate of 15% is rewarded to qualified enterprises that are commissioned by enterprises or the government to operate or maintain environmental pollution control facilities. Requirements for qualified enterprise are:

  • The enterprise shall be registered in accordance with PRC law;
  • The enterprise has been operating or maintaining environmental pollution control facilities for more than a year;
  • The enterprise shall hire no less than five technicians with intermediate titles, or two with senior titles;
  • The annual income deriving from environmental protection services must account for at least 60% of total revenue;
  • The enterprise shall have resources and laboratory of its own to meet the testing standards of pollutants;
  • The enterprise shall be able to ensure normal operation so that pollutants can be continuously monitored and treated to meet required standards; and
  • The enterprise shall have a tax credit rating not assessed as C or D within the past three years.

Enterprises may self-declare to be included within the regime of the incentive. Afterwards, the ecology and environment department may be engaged in when verifying an enterprise’s eligibility.

Wintertaling China Desk will you posted about the implementation of new legislation in China. Should you have any questions, please do reach out to us. We accept no liability for any mistakes or misinterpretation. This article is merely a general advice.

[1] Announcement on deepening policies related to VAT reform, <http://www.chinatax.gov.cn/n810341/n810755/c4160283/content.html>

[2] Announcement on deepening policies related to VAT reform, <http://www.chinatax.gov.cn/n810341/n810755/c4160283/content.html>

[3] https://www.china-briefing.com/news/china-pollution-control-tax-incentives/