The Chinese government has launched a series of Value-added Tax (“VAT”) reforms over the past few years to align its VAT system with internationally accepted principles, and to adapt to the economic development in China and the world at large, with an aim to modernize the country’s governance system and administration capabilities. On 1 July 2014, the multiple VAT rates of 6%, 4% and 3% (for small-scale VAT payers) were simplified and unified into a single rate of 3%. On 1 May 2016, the Business Tax (“BT”)-to-VAT reform was rolled out nationwide wherein BT on taxable services was replaced by VAT, such that input tax credit could be fully available along all cycles of value chains in order to avoid the cascading effect of BT. On 1 July 2017, the 4-tier VAT rates of 17%, 13%, 11% and 6% were simplified and unified into the 3-tier rates of 17%, 11% and 6%. All the above measures were made to continuously develop a simpler, clearer and more scientific VAT system. In 2018, the Chinese government continued to deepen the VAT reform with three significant measures. First, from 1 May 2018, the VAT rates were appropriately lowered from 17% and 11% to 16% and 10% respectively, resulting in a 3-tier VAT rate structure comprising VAT rates of 16%, 10% and 6%. Second, the annual turnover thresholds of RMB500,000 (€66,800) and RMB800,000 (€106,900) applicable to small scale VAT payers engaged in manufacturing and trading respectively were unified and increased to a single threshold of RMB5,000,000 (€668,400). Third, the scope of excess input tax refund was extended. More specifically, the current scope of excess input tax refund for qualified sectors and enterprises has now been extended to qualified enterprises engaged in modern services (e.g. research and development) and advanced manufacturing (e.g. equipment manufacturing), as well as power grid enterprises. For these enterprises, one-off excess input tax refund is allowed. The above three VAT reform measures were key decisions made by the government for building a modernized economic system, deepening the supply-side structural reform and improving the business environment, following a comprehensive analysis of the developmental trends of the global and domestic economies. These measures make a significant breakthrough for the goal of establishing a quality VAT system, as well as observing the fundamental principles of tax neutrality, efficiency, fairness and simplicity in formulating tax policy as advocated in the OECD International VAT/GST Guidelines. These reform measures demonstrate not only a continuously growing alignment of China’s VAT system with the international standards on VAT design and operation embedded in the OECD Guidelines, but also China’s commitment and contribution to the development of consistent and effective international VAT policies as a member of the OECD’s Global Forum on VAT. The key features of this round of reforms are as follows: (…)
