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Vishal Patel, director of solutions marketing at Tradeshift, talks about the tax changes in China and what they will mean for procurement
China, the second largest economy in the world, has been implementing its largest tax reform in decades. More than 10 million companies in large services industries like hospitality, financial services, construction and healthcare will need to adjust to that new system. But, while it may bring change, for procurement, there may just be some significant benefits.
The current dual system of provincial-managed Business Tax (BT) is changing to one VAT system that will be managed by the central government.
The goal of this reform is to cut red tape and try to stimulate the economy. But, as with any major tax overhaul, the change is complex. China’s VAT is one of the most intricate in the world, featuring multiple rates and industries that are exempt.
The changes are expected to be rolled out in 2017, but its complex nature is here to stay. Many industries will continue to labour under alternative sets of VAT rules despite the unifying nature of the reform.
Still, if you are doing business with Chinese suppliers, there are many advantages to the new tax system.
For example, cross-border services will no longer be subject to BT. Instead, exported services will either be zero-rated or tax exempt, while VAT on imported serviced can be reclaimed. If you sell goods or services in China you will be able to claim back incoming VAT on all services assuming you are registered as a general taxpayer in China.
The system will also be closer aligned with international tax systems and practices, which should help facilitate cross-border trade with greater transparency.
Issuing invoices (or fapiao in Chinese), which is an essential element of China’s tax system, will become more straight forward.
Invoicing is highly regulated in China, similar to some of the tax systems in many Latin American countries. Invoices can only be issued using government-approved solutions sold through licensed resellers. The Chinese government keeps records of those transactions, which serve as evidence of tax payments.
It is also the way in which the government monitors value-added tax (VAT) paid on any transactions.
The reforms will see a switch to e-invoicing, which will reduce the cost of producing, printing, transferring, and storing invoices. More importantly, it will help optimise business processes around VAT compliance, reporting, invoice approval, and accounting. There are various rules in place when dealing in e-invoices that multinationals needs to be aware of and technology can make simpler.
If your organisation is operating in China, you should examine how to integrate your existing worldwide e-invoicing and EDI infrastructure to provide better visibility into transactional document and data flow and data within the region and globally.
Get that right and doing business in China may just become that much easier.
Vishal Patel is director of solutions marketing at Tradeshift
This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.