China: The attention of the contract facing to replace the business tax with VAT

Part One: Appropriate choice of taxpayer identity 

Based on the scale of operation and the sound level of accounting systems of payers, taxpayers are categorised into general VAT taxpayer and small-scale VAT taxpayer. The general taxpayers shall apply general tax law; while the small-scale VAT taxpayer shall apply simple calculation methods. In accordance with the Tax File Number 36 [2016], general taxpayers who fulfilled the conditions may choose simple calculation methods. Due to the difference between taxation method, tax rates and tax burden, the taxpayer should choose the most appropriate status reflecting their actual situation. 

Part Two: Obtain legal and effective VAT deduction voucher 

The enterprises that choose the general method of tax calculation may reduce their tax burden by the input deduction. Legal and valid VAT deduction vouchers are available for special VAT invoice, customs import VAT payment, purchase invoices and sales invoices for agricultural products, tax payment receipts, etc. The enterprise should focus on the management of special VAT invoices, and strictly control information of qualification of the special VAT invoice. 

Part Three: Ensure “third-rate unity” 

The so-called “third-rate unity” refers to the cash flow, invoice flow and logistics are consistent. Specifically, not only recipient and sellers of goods or service provider must be the same economic subject, but also the payer, goods or services recipient must be the same economic subject. If during the process of economic transactions, company is unable to ensure the cash flow, invoice flow and logistics (service) flow mutual unification, fare will appear inconsistent, and will be suspicious of falsifying the invoice, defray of virtual by the tax department audit judgment. Consequently, the company will be subject to a certain administrative penalties or even legal risk by criminal punishment.

Part Four: Clear tax related terms and related matters 

The transaction should be clear in the contract taxes and related matters. As agreed in the contract: both parties shall be in accordance with the relevant provisions of the state, and bear the burden of taxes and fees. After replacing the business tax with VAT, matters involving the VAT taxpayer identity, method of calculating tax, applicable tax rate (levy rates), the scarlet letter issue special VAT invoices and other issues can be addressed in the tax-related provisions.

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