World watches China to assess effect of the tax reform

0 Comment(s)Print E-mail China Daily, May 3, 2016
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Financial services firms hope the Chinese tax authorities will announce soon more detailed rules on the new value-added tax or VAT system to clear the confusion over its impact on their tax burden.

Some said VAT will increase their outgo while others said it could decrease.

Matthew Wong, PwC China's financial services tax leader, said: "We talked to a number of bankers and they cannot see how this reform can help banks reduce tax because the rate is higher and the amount of input VAT they can credit is difficult to be estimated.

"Until the government can further clarify on some of the uncertainty about the interpretation of the VAT rules, it's premature for us to say the VAT reform can save tax for the banking industry at this stage."

The financial services sector in China has been paying 5 percent business tax or BT for many years, but from Sunday, the 6 percent VAT took effect.

Many taxable items still require further clarification from the authorities concerned, Wong said. For instance, the new VAT rules have exemptions on interest amount in connection with interbank funding activities, but the scope of exemptions is narrower than that under the old business tax rules. This will likely lead to higher costs in the re-lending business.

Kenneth Leung, EY Greater China indirect tax leader, said: "Under the VAT rules, banks will have to change their management system and mindset in various aspects of operation."

Previously, when banks purchased computers, they simply needed to choose a provider that asked for the lowest price. Now, they have to consider which provider could issue VAT invoices at better rates, in addition to the price.

Leung said the tax reform requires taxpayers to invest on additional resources such as talent and IT systems. Some large financial institutions would need to spend more than 400 million yuan ($62 million) to modify their business operations.

"But the tax burden on banks could be reduced if they can manage input VAT credits well," he said.

Lachlan Wolfers, head of indirect taxes at KPMG China, said the change from BT to VAT may seem like a tax increase but in reality it is not. BT is levied on the gross revenue earned by financial institutions whereas VAT is levied on the "value added".

"Financial institutions will now be able to claim input VAT credits for their costs and expenses for the first time. So, in an overall sense, it is expected that the tax burden on financial institutions may actually fall as a result of these changes," he said.

Over the past decade, many countries have explored the possibility of introducing VAT for the financial services sector, but have not been able to do so successfully because it has been very difficult to measure the "value added" to financial services on a transaction-by-transaction basis.

"What is taking place in China from May 1 is very much a world's leading approach which many other countries are watching closely. If China does this successfully, you can expect many other countries will follow," Wolfers said.

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