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Calculating Value-Added Tax in China

2013-12-24 15:30:39 Release Author: Read Flow:5654次

In 2012, China launched the value-added tax (VAT) pilot reform to improve the efficiency of its national tax system. The VAT pilot reform replaces business tax (BT) with VAT in the transportation industry and certain modern service sectors at the start of 2012.

First implemented in Shanghai, the reform expanded to Beijing in September 2012 and Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei later in the same year. On August 1, 2013, the VAT pilot reform was implemented nationwide, as formalized by the promulgation of the Notice Concerning the Nationwide Adoption of VAT in lieu of BT Pilot Tax Collection Policy in the Transportation Industry and Certain Modern Service Industries (Caishui [2013] No. 37, “Circular 37”) by China’s Ministry of Finance (MOF) and State Administration of Taxation (SAT) on May 24, 2013.


Calculating VAT
There are two methods for calculating VAT payable – the general calculation method and the simplified calculation method. Generally, the former applies to general taxpayers and the latter applies to small-scale taxpayers.


General Calculation Method
VAT payable under the general calculation method is the current output VAT deducted by the current input VAT, i.e.:

  • VAT payable = Current output VAT – Current input VAT

Output VAT refers to the VAT amount calculated according to the sales volume of the taxable services provided and the applicable VAT rate, i.e.:

  •  Output VAT = Sales volume x VAT rate

Sales volume refers to the entire price and other charges obtained by the taxpayer from providing taxable services. Where the taxpayer’s pricing combines sales volume with output VAT, the below formula should be used to calculate the sales volume:

  •  Sales volume = Tax-inclusive sales volume / (1 + VAT rate)

Input VAT refers to the VAT paid or borne by the taxpayer when purchasing goods or receiving processing, repair and replacement services and taxable services. Input VAT that can be deducted from output VAT includes the VAT amount specified on:

  • A special VAT invoice (including goods transportation industry VAT special invoices) obtained from the seller;
  •  A Customs Import VAT Special Payment Document obtained from Customs; or
  • A tax payment certificate obtained from the tax authority or Chinese agent for taxable services provided by foreign entities or individuals (in this case, the written contract, proof of payment and bill or invoice issued by the foreign entity are also required).

Example:
A design company purchases RMB600 worth of design services from a supplier, and then provides RMB1,000 worth of design services to a customer. The VAT rate for design services is 6 percent. The VAT payable is RMB1,000 x 6% – RMB600 x 6% = RMB24

If the current output VAT amount is less than the current input VAT amount, the outstanding portion can be forwarded to the next filing period. Certain input VAT items cannot be deducted from output VAT. These include non-VAT taxable items (i.e., BT taxable services, transfers of intangibles and real property, as well as construction and renovation of real property), VAT-exempt items, and items that adopt the simplified calculation method.

If a taxpayer provides taxable services that are subject to different rates, the sales volume for each tax rate should be accounted for separately, or else the highest tax rate applies. Similarly, VAT taxpayers who concurrently provide services subject to BT should conduct separate accounting, or the in-charge tax authority will determine the sales volume for the taxable services.

Where an overseas entity or individual provides taxable services in China and does not have an operating entity in China, the tax withholding party should calculate the amount of tax to be withheld using the below formula:

  • Amount of tax to be withheld = Price paid by the service recipient / (1 + VAT rate) x VAT rate


Simplified Calculation Method
Under the simplified calculation method, no input VAT is deductible and a uniform 3 percent levying rate applies:

  • VAT payable = Sales volume x VAT levying rate (i.e., 3%)





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