The pilot program expands VAT to the services sector in mainland China, replacing Business Tax (BT). In a joint circular Cai Shui  No. 71 (Circular 71), dated 31 July 2012, the Ministry of Finance and the State Administration of Taxation announced the implementation dates for each location as follows:
- Beijing (1 September 2012)
- Jiangsu and Anhui (1 October 2012)
- Fujian (including Xiamen) and Guangdong (including Shenzhen) (1 November 2012)
- Tianjin, Zhejiang and Hubei (1 December 2012)
This expansion will mean that the majority of China’s commercial centers will be covered by the VAT reforms. Further expansion to the remaining cities and provinces in China is expected to take place in 2013.
Circular 71 confirms that the same pilot program rules and service industries as Shanghai will be covered in each of the new pilot locations. Namely, the transportation and modern services industries. Financial and insurance services, real estate and construction, telecommunications and postal services, and entertainment services, remain subject to BT. However, they are expected to be brought within the new VAT regime progressively from 2013.
An underlying theme of the VAT reforms is the extent to which the new VAT rules have attributes which are consistent with international models of VAT applicable in jurisdictions such as Australia, New Zealand and the EU, while still retaining some distinctly Chinese characteristics. For multinational companies either doing business in China, or doing business with China, there are a number of changes which potentially benefit them, including:
- services provided from China to overseas, or from overseas to China, can now be structured so there may be no effective VAT cost. Previously, cross-border services were generally subject to a 5 percent BT cost. This benefit can apply to a broad range of services provided cross border, including intercompany service arrangements, transfer pricing arrangements, royalties for intellectual property rights, back office support services, management services and many more.
- manufacturing companies and other VAT taxpayers currently selling goods in China can now claim input VAT credits for the services they purchase from suppliers subject to the VAT pilot program, whereas previously those services usually incurred a 5 percent BT cost.
- businesses providing services in China, or granting intellectual property rights, can now claim input VAT credits for the purchase of goods fixed assets and services in their business (provided they are registered as a general VAT taxpayer with the tax authorities). Previously, no such credits were available.
Circular 71 gives businesses more certainty to prepare for the VAT reforms, and a clear timetable for doing so. We recommend that businesses take action as soon as possible to prepare for the VAT reforms by preparing a project plan which prioritizes key tasks, including:
- considering the financial impact of these changes, and how they will affect pricing
- reviewing and updating contracts
- training staff
- communicating the effects with customers, and negotiating the passing on of tax savings from suppliers
- updating IT systems
- assessing and applying for access to exemptions and other concessions.