Partner, Llinks and Partner, Richard Wang & Co. respectively
On November 10, 2008, the State Council promulgated the revised Tentative Regulations on Value-added Tax of the People's Republic of China (the Tentative Regulations) in advance of full-scale value-added tax (VAT) reform in Mainland China.
Authors Clare Lu and Catherine Chen write: Since 1994, the Production Type VAT regime has been in force in Mainland China, under which system, the input VAT included in the purchase price of fixed assets is not creditable against output VAT when calculating VAT payable. From January 1, 2009, Mainland China introduced the Consumption Type VAT regime... Under the Consumption Type VAT regime, input VAT included in the purchase price of fixed assets is allowed to be credited against output VAT when calculating VAT payable. The... VAT reform...t will eliminate double taxation on fixed assets (primarily machinery), and thus could reduce taxpayers' tax cost on fixed asset investment. However, in our view, ... offsetting factors and uncertainties cannot be ignored when calculating the increments on profit and cash flow under the Consumption Type VAT system.
Firstly, after the VAT reform, corporate income tax expenses will be increased. The impact of VAT reform on corporate income tax expenses is comparatively indirect, i.e. if the input VAT on the purchase of fixed assets is deductible, such input VAT cannot be included in the book value of fixed assets and therefore the depreciation expenses will be decreased, which will lead to the increase in corporate income tax expenses.
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Secondly, the VAT reform might abolish 1) preferential treatment (i.e. exemption on customs duties and import taxes) on imported equipment enjoyed by qualified foreign-invested enterprises and domestic invested projects; and 2) VAT refund policies enjoyed by qualified foreign-invested enterprises on purchase of domestic manufactured equipment.
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Thirdly, the Consumption Type VAT regime is not applicable to all fixed assets.
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Finally,... there are some outstanding matters in the Tentative Regulations that requires further clarification and illustration... In our point of view, as the input VAT is deductible under the Consumption Type VAT regime, the tax exemption on selling of used fixed assets might probably be cancelled.
NB: This article was written prior to the promulgation of the revised Detailed Rules on the Implementation of the Tentative Regulations on the VAT; and the General Administration of Customs has not made clarifications on the availability of duty exemption on imported equipment after the VAT reform. Please refer to the article that follows on the impact generated by the Detailed Rules for the Implementation of the Tentative Regulations on the VAT and associated laws and regulations to be promulgated in the future.