China launches pilot programme to reform turnover tax regime

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

China launches pilot programme to reform turnover tax regime

chinaflag.jpg

China this week released details of its pilot programme to reform its turnover tax regime.

The measures, to be piloted in Shanghai from January 1 2012, will see VAT and business tax merged into a single tax. As such, it will shift the burden of taxation from businesses to consumers and will be a welcome step for corporate taxpayers.

"This reform will have far-reaching implications for domestic and foreign suppliers of goods and services in China, affecting overall tax burdens and the allocation of tax burdens in the supply chain and in some cases prompting changes in business models that suppliers have adopted for China," said Jon Eichelberger of Baker & McKenzie.

VAT rates, at present 17% and 13%, will be cut for a number of different industries.

Transportation services will have their rate reduced to 11%, while R&D, IT, cultural, creative, logistic, ancillary, certification and consulting services will all have their rates slashed to 6%.

Leasing of tangible movable property will remain at 17%. Financial services, real estate and construction services will remain outside the scope of the reform, although provisions have been made to incorporate financial services into the VAT system in the future.

Issues may arise over what tax is due where in cases where it is difficult to determine where services take place while the reform remains limited to the Shanghai pilot.

“Quite clearly, businesses subject to the pilot program need to actively engage both internally with key stakeholders, and externally with their advisers, to prepare for the reforms,” said an alert from KPMG.

Despite the geographical limitation of the pilot programme, and its limitation to certain industries, it is expected to inform nationwide reform.

VAT incentives for software

The Chinese tax authorities have also defined the scope of indirect tax incentives that have been put in place to encourage the country's IT sector.

The State Administration of Taxation (SAT) has previously granted VAT refunds, or preferential rates of VAT, on software products. However the impact of these incentives has been limited by a lack of clarity about what counts as a software product.

Circular 100, which applies retrospectively to the beginning of the year, has made clear that VAT refunds apply to computer software and information systems, but also to embedded software - software that is designed for machines such as aircraft, cars and other hardware whose function is not primarily that of a computer.

At the same time, there remains some ambiguity as to whether software companies are liable to pay corporate tax on the VAT refunds they receive.

more across site & shared bottom lb ros

More from across our site

Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Representatives from the two countries focused on TP as they met this week to evaluate progress under a previously signed agreement – it is understood
The UK accountancy firm’s transfer pricing lead tells ITR about his expat lifestyle, taking risks, and what makes tax cool
Dolphin Drilling intends to discuss the final liability amount and manner of settlement with HM Revenue and Customs
Winning the case against the 20% VAT imposition was always going to be an uphill challenge for the claimants, UK tax advisers argue
A ‘paradigm shift’ in Chile’s tax enforcement requires compliance architecture built on proactive governance, strategic documentation and active monitoring of judicial developments
Gift this article