Following three months of economic disruption from the COVID-19 coronavirus, the Chinese government is seeking progressive economic normalisation.
Numerous tax relief and financial support measures were introduced since January to keep businesses afloat and minimise lay-offs. These included social security and tax payment deferrals, VAT exemptions, and corporate income tax (CIT) deductions for COVID-19 related costs. With domestic supply-side disruption being resolved, and in view of decreased demand from export markets, it appears likely that the next step will be measures to boost demand.
For this, observers are keenly awaiting the ‘Two Sessions’ meetings of China’s national legislature, scheduled to begin on 21 May. In the meantime, a number of more minor policy clarifications have been made.
Small businesses have struggled in the COVID-19 disruption period. In order to push financial institutions to lend to these small businesses, the VAT exemption for interest income on loans of less than RMB 1 million ($141,250) to such businesses has been extended to 2023 (this was originally set to expire on December 31 2019).
Tax rule clarifications have been made to boost the production of COVID-19 prevention and containment supplies. The China CIT rules allow for a deferral of dividend withholding tax (WHT) where profits of a foreign company are reinvested in China for use in defined activities. It has since been clarified that this will cover the above-mentioned production activities.
While general cross-border trade has been impacted by global COVID-19 disruption, cross-border e-commerce activity continues to grow. To support this bright spot, the Chinese government has decided to set up additional 46 cross-border e-commerce pilot zones, bringing the total to 105. Businesses in these zones can avail of VAT and consumption tax exemptions on their exports.
For general cross-border trade supportive measures are also being taken. China VAT rules generally do not directly refund all input VAT incurred by exporters, but rather provide partial refund through export tax rebates. China’s Ministry of Finance (MoF) and State Taxation Administration (STA) have announced that, effective from March 20, the export tax rebates will be increased to 13% for 1,084 products (including sanitary appliances, petrochemicals), and to 9% for 380 products (including plant growth regulators, breeding stock, chilled meat).
The rates should effectively achieve the full refund of VAT for these products, given the rates normally applied to them. Measures are also being taken to reduce restrictions and tax burdens on China’s processing trade (i.e. processing of imported raw materials for export).
In addition, at the tax administrative level, the COVID-19 disruption has pushed forward digitalisation efforts that were already well underway. In order to minimise the risks of COVID-19 transmission in January, the Chinese tax authorities launched the ‘no-contact’ tax services system. The system is largely built on the basis of the pre-existing e-tax bureau system, and allows taxpayers to deal with tax matters remotely.
Some provincial tax authorities also provide other channels, such as mobile applications and WeChat mini-programme interfaces. So far, there are 185 tax matters that can be dealt with online, and more are expected to be added by the end of 2020.
Lewis Lu
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