China VAT

The Chinese Value Added Tax regime is one of the most progressive and broadest consumption tax regimes in world. Many goods and services are subject to 16% VAT, but there are four rates in total, as well as nil-rating. Whilst advanced in its scope, Chinese VAT is complex, and the returns are among the most challenging in the world to fully complete.

VAT was first introduced into China in 1984. It is administered by the State Administration of Taxation, with local bureaus being responsible for its collections.

Between 2012 and 2016, China’s VAT regime underwent a significant overhaul to widen the range of taxable supplies subject to VAT – including extending VAT to financial services such as banking and insurance. The reforms were designed to: simplify compliance; reduce double taxation; encourage outsourcing and boost local consumption as the country moves away from an export-led economy.

The reforms also included the withdrawal of Business Tax, an indirect tax on services levied at between 3% and 5%.

China levies VAT on a broad range of goods and services. This includes imports; however exports are exempt. Unusually, most financial services are liable to VAT, including deposit account interest. Also, sales of residential property between consumers is subject to VAT, unlike in most other countries.

VAT is only applicable in mainland China. The Special Administrative Regions of Hong Kong and Macau are excluded.

Businesses and individuals providing taxable goods and related processing services or who import into mainland China are liable to VAT. There are two types of VAT registration in China: small entrepreneur; or general business. There are varying turnover thresholds to determine which category an enterprise is categorised as (up to RMB 800,000 per annum is the cut off), and reporting requirements are different.

Typical situations requiring a Chinese VAT registration include:

• The importation of goods into China;
• Where goods are manufactured within China;
• If goods are reworked or reprocessed in China;
• Installations in China; and
• Certain exports of goods from China.

The registration threshold is Yuan 30,000 per annum.

Non-resident traders operating in China, unlike Europe and many other parts of the world, cannot register for VAT as non-resident traders. If a trader is providing services into China, its local representative or its customer is responsible for accounting and reporting the tax.

It is more usual in China for non-resident traders to form a local company (e.g. WOFE) in order to register for VAT.