United States

China: VAT Expanded to All Industries Effective May 1, 2016

Apr 04, 2016
From KPMG TaxWatch

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On March 24, 2016, China’s Ministry of Finance and State Administration of Taxation jointly issued guidance (Circular Caishui [2016] 36) detailing the expansion of value added tax (VAT) to certain industries that are currently still subject to Business Tax (BT). These industries include real estate, construction, financial services and insurance, and lifestyle services. This expansion is effective May 1, 2016.

Construction and real estate services will be subject to an eleven percent VAT. Currently, construction services are subject to a three percent Business Tax and real estate services are subject to Business Tax at five percent. Real estate services include both sales and leasing of all types of real estate categories, including residential, retail, office, industrial, and commercial property. However, services provided by real estate agents, property managers, architects, and surveyors are not classified as real estate and construction services, but are taxable under the “other categories” services subject to a six percent VAT. For more information on the VAT rules applicable to construction and real estate services, please click here.

Unlike in most VAT-imposing countries, in China financial services will be subject to VAT at six percent (compared to a five percent BT). Financial services include loan services (e.g., interest income from lending transactions, overdraft interest, and interest derived from holding financial products), financial services that are subject to commission fees (e.g., handling currency and capital, exchange of foreign currencies, and account management), insurance services, and the trading financial products (e.g., transfer of ownership of foreign exchange securities, non-commodity futures, and other financial products). It is currently uncertain whether late payment interest and similar charges imposed by vendors may also fall under the financial services category. Circular 36 exempts very few transactions including interbank lending, certain intercompany financing arrangements, and life insurance and health insurance products with a term longer than one year. For more information on the VAT rules applicable to financial services, please click here.

The last sector transitioning to VAT is the so-called lifestyle services sector, which includes a large and diverse range of taxpayers. In sum, all remaining businesses that are still subject to BT fall under this category. Lifestyle services will be subject to VAT at six percent (these services are generally subject to a five percent BT). Lifestyle services include cultural and sports services, education and healthcare, travel and entertainment, food and beverage, accommodation, and citizen’s daily services (e.g., home assistance services, aged care, emergency services, and beauty services). Circular 36 clarified that agency services such as brokers, agents, wealth management services, and HR services should be considered as modern services, which are already subject to VAT at six percent. For more information on the VAT rules applicable to lifestyle services, please click here.

The short timeframe to implement the new rules will not only be challenging for businesses involved in these three industries, but also for all other businesses in China that purchase these services. For more information on these VAT changes, please contact Frank B. Sangster at (267) 256-1680 or Sandy Nicholson at (408) 367-2801.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.