China In­sight - Tax

China mov­ing for­ward to ex­pand VAT scope with Shang­hai as Pi­lot Re­gion

01/01/2012

In China, there are two major kinds of turnover taxes, i.e. VAT and business tax ("BT"). They cover different scopes of transactions. The VAT system mainly covers import and sales of movable/tangible goods, while the BT system covers services, transfer of intangibles and immovable properties. A few exceptions are processing, repairing and maintenance services which are covered by the VAT system, not the BT system.   The BT system has been widely criticized for not having the input-output credit mechanism which is adopted in the VAT system. Such feature of the BT system means that BT costs are not recoverable by either party. Further, in case of subcontracting of services, the portion of the subcontracted service value will be taxed twice for BT purposes (once at the main-contractor and once at the subcontractor). In addition, due to the different tax rates and systems, the simultaneous operation of both VAT and BT systems has caused various administrative problems for both taxpayers and tax authorities.

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China Insight - Tax
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