measures saw VAT and business tax merged into a single tax,
shifting the burden of taxation from businesses to
Lachlan Wolfers, a tax partner
at KPMG China, points out that the expansion of the pilot
program geographically throughout mainland China was part of
the government's original plan.
"However, the pace of the
expansion looks likely to occur quicker than many anticipated,"
said Wolfers. "This may be partly due to the fact that the
reforms, in most cases, reduces the tax burden for business,
which assists business during this period of global economic
Christina Liu, finance
controller at recruitment firm Hays, agrees that the reforms
are beneficial for her company.
"Given the current business tax
born by our company, VAT would significantly lighten our load
in terms of tax burden," said Liu.
Liu wants to see the programme
"I believe China will
effectively improve the VAT system by replacing current
business tax for a more straightforward control throughout the
country," she said.
Wolfers reports client feedback
of the pilot has so far been extremely positive.
"For most taxpayers, the shift
from business tax to a more modern and internationally
recognised tax, like a VAT, is clearly welcomed," he said.
"It's also important to recognise that the pilot program
benefits many businesses in the manufacturing and retail
trading sectors too, because they can now claim input VAT
credits for the services they acquire."
He notes that the head offices
of many multinational companies are pleased to see the reforms
occurring, particularly because the treatment of cross-border
transactions is much more internationally competitive than
under the old business tax system. The VAT is also more
familiar to them, even though it does have many uniquely
"This is not to suggest that all
businesses in Shanghai have had their tax burden reduced," said
Wolfers. "Certain businesses in the transportation and
logistics sector may have had their tax burden increased, but
the government is responding to this with various assistance
measures. The key message is that the government has been
prepared to listen and respond - this has been critical to the
early success of the pilot program."
After Beijing, Chongqing,
Tianjin, Shenzhen and Jiangsu are the most likely locations to
receive the pilot programme, with other provinces also likely
to join. If the local governments in those provinces have seen
businesses in Shanghai benefiting from the pilot program, then
it is logical that they will want to ensure their own
businesses remain as competitive.
Wolfers believes that once the
reforms have been expanded across all of mainland China, then
the scope may be expanded to cover other areas such as
financial and insurance services, real estate and construction,
entertainment, post and telecommunications, until business tax
has been phased out entirely.
"The experience and pace of the
reform in Shanghai has been frenetic," said Wolfers. "When
other countries such as Australia implemented similar reforms,
they gave businesses 18 months to prepare, but in Shanghai
businesses were given a little over six weeks."
"It was difficult for
traditional business taxpayers, and even for tax bureaus, to
adjust to VAT within one and a half months," confirmed Liqun
Geo of Deloitte. "The rules came out on November 16 2011 and
were effective on January 1 2012. But generally speaking,
businesses found the pilot a good move because they have more
input VAT credit and reduced cost for services."
Wolfers points out that the key
is to maintain the perspective that the long-term benefits for
business outweigh some of the short-term challenges.
"The tax authorities in Shanghai
also worked very hard to assist business with implementation,
which has been critical to the success of the pilot program,"
Wolfers reports that many larger
businesses have put together project teams to implement the
reforms - bringing staff from sales, marketing, procurement,
IT, legal and finance functions to enable them to break down a
large change into smaller more manageable processes.
"I have been really impressed
with the extent to which businesses in China have adapted to,
and embraced these reforms," he said.