Steps and precautions companies in China must take to comply with the 2018 VAT Reform
In an effort to reduce taxes by RMB 400 billion, China recently announced cuts on Value-Added Tax (VAT) rates and expanded the criteria for enterprises to qualify as small-taxpayers. Also, the State Administration of Taxation (SAT) and the Ministry of Finance (MOF) defined how to change the taxpayer status from general taxpayers to small-scale taxpayers.
To support this tax reform, SAT issued two important Circulars that explain how to transition:
- SAT Announcement n. 17 ;
- SAT Announcement n. 18 .
The tax reform will enter into effect on May 1st, 2018. Companies located in China Mainland or doing business with the P.R.C. shall act promptly to enjoy the tax deduction and comply with the new system. Operations will likely be positively affected by this tax update.
S.J. Grand highlights the main points of SAT Announcements to let you understand how to apply for new VAT rates and which steps to take for being in good standing.
How to Transition from General Taxpayer to Small-Scale Taxpayer
According to Article n. 2 of the Notice of the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) concerning the Standardization of Small-Scale VAT Payers (Cai Shui  No. 33), the general taxpayer who meets the following conditions may choose to register as a small-scale taxpayer or continue to act as a general taxpayer. The transition can be carried out until December 31, 2018.
- The general taxpayer must be registered as such according to Article n. 13 of the Provisional Regulations of the P.R.C. on VAT and Article n. 28 of the Detailed Rules for the Implementation of the Provisional Regulations of the P.R.C. on VAT;
- The cumulative value of VAT sales shall not be more than RMB 5 million for 12 consecutive months before the date of registration (1 months for 1 tax period) or for 4 consecutive quarters (1 quarter for 1 tax period).
If the operation period before the date of transfer registration is less than 12 months (or 4 quarters), the accumulated taxable sales amount (RMB 5 million) should be estimated according to the monthly (quarter) average taxable sales volume. The scope of taxable sales shall be in accordance with the registration and management of the VAT general taxpayer (Announcement N. 6 and 43).
The criteria to qualify as general or small-scale taxpayers is based on the enterprise’s annual revenue. Before the reform, depending on the industry, there were three annual revenues’ thresholds to be qualified as small-taxpayer. Today, thresholds have been unified into one: RMB 5 million. Being a small-scale taxpayer allows you to pay lower VAT obligations.
Taxpayers who are in conformity with the above-mentioned provisions can fill in the registration form to transition from general taxpayer to small-scale taxpayer. They must also provide competent tax authorities with the tax registration certificate. However, taxpayers who have implemented real-name taxation do not need to provide tax registration certificates. Competent tax authorities will handle cases according to the accuracy of provided information.
If the information is correct, the general taxpayer can now be regarded as a small-scale taxpayer (hereinafter “registered taxpayer”).