China has one of the most archaic corporate tax systems in the world, from which the new value-added tax structure was supposed to provide much-needed relief.
China’s tax complexity and inconsistent enforcement has become an efficiency drain on China’s own economy and a roadblock to foreign companies wishing to set up business in China.
The country’s ongoing conversion from business tax to value-added tax (VAT)—which aimed to jumpstart corporate investments—has hit a snag. And after years of empty promises, top policymakers in Beijing finally gave indications that broad VAT tax reform to lower the overall corporate tax burden is on the way. Expectations for reform rose after tax policy statements leaked late last December following the Central Economic Work Conference, a policy-setting congregation of top central government and Communist Party officials.
Chinese media outlets cited these documents, which delineate plans to reduce VAT rates for several industries and contain designs and schematics aimed at reducing overall corporate taxes.
But it may be too little, too late. China’s corporate tax reform now faces a perfect storm of reduced business growth forecast and a slew of political and economic headwinds.
Streamlining VAT
Streamlining China’s VAT system has implications for domestic businesses and foreign businesses looking for a foothold in China.
While VAT is a foreign concept in the United States, it’s a popular direct tax system in most European and Asian countries. Under the VAT, a seller reduces the tax paid for its purchases from the tax it charges its customers. In effect, tax is levied only on the “value-added” component at each stage of production.
In practice, VAT differs greatly from the existing business tax, introduced in 2008 and levied on a company’s total sales without considering cost of inputs. Business tax creates double taxation issues, whereas VAT is imposed only on new value created by a company.
In 2012, China began phasing out corporate business tax and replacing it with VAT, with the goal of full implementation across all industries by 2015. The goal was to lower the overall tax burden of businesses and reduce the price of goods and services downstream for consumers.
