China Continues B2V Reform

The tax reform in China that replaces Business Tax with Value Added Tax (B2V) for the service industry continues to build momentum. A pilot program to apply Value Added Tax (VAT) to designated service sectors began on January 1, 2012 and has been expanding its scope ever since. As mentioned in a previous article, “China’s VAT Reform“, ten service sectors were moved from the Business Tax (BT) to VAT in March 2014. On January 1, 2014, both railroad and postal services were added. Since then, businesses have focused their attention on the next potential service industry to be included in the VAT reform, telecommunications, which was originally subject to BT at a reduced rate of 3%. Back in March, the general prediction by businesses was that telecommunications would be transferred to the VAT regime in April, and the rate would be either 6% (the general Pilot VAT rate for modern services) or 11% (the VAT rate applicable to transportation services, postal services, and railroad services). The China Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly published a Notice on April 29, Cai Sui [2014] No. 43, announcing the inclusion of telecommunications in the pilot VAT program as of June 1, 2014. Both rates (6% and 11%) are used. The rate of 11% applies to “Basic Telecommunications Services,” and the rate of 6% applies to “Value-Added Telecommunications Services.” Basic telecommunications services include a provision for voice calls and sales of network elements, such as bandwidth and wavelength. Value-added telecommunications services include messaging, data services, internet access and satellite television signal ground transmission. Different price elements in a bundled sale should be identified so that appropriate rates apply respectively. Telecommunications services provided for free as a result of redeeming accumulated usage “points” are not subject to VAT.  The Notice also clarifies that telecommunications services provided to entities outside China are exempt from VAT. The inclusion of telecommunications services in the B2V reform is expected to have mixed impacts on the overall industry in China, which is represented by three major state-owned wireless carriers; China Mobile, China Unicom and China Telecom. As discussed in the previous article, the main advantage of VAT over BT to businesses is that VAT allows input tax credit for taxes payable on purchases (i.e., business costs), which is not available under BT. On the other hand, the increase of the tax rate is significant, from 3% (BT) to 6% or 11% (VAT). Foreign businesses in China can also be affected as receivers of telecommunications services, or as (potential) investors in the Pilot Shanghai Free Trade Zone (FTZ). The Pilot FTZ, established last September, opened up value-added telecommunications services to foreign invested telecommunications enterprises. More detailed rules for foreign investors were published in April. B2V reform is a key deployment of China’s 12th five-year national economic development plan, covering 2011 through 2015. After telecommunications, service sectors which still need to move from BT to VAT include personal services, construction, real estate and finance.  A statement issued by the Ministry of Finance on March 13, 2014 announced that “the country will steadily expand the scope of the pilot reform and strive to complete the reform by the end of the 12th Five-Year Plan.”