VAT Reform in China Reaches a Critical Turning Point

Abstract

In May 2016, China's indirect turnover tax on services and transfers of real property, the Business Tax, was terminated and with supplies formerly subject to the tax shifted into the VAT. This paper explains the background to the transition from the Business Tax to the VAT and the new rules that apply to the types of supplies that were transferred. A number of new rates were added to the VAT for various types of transferred supplies. Most transferred supplies are subject to ordinary VAT rules, including input tax credits for acquisitions of taxable supplies. However, more complicated rules apply to financial supplies, particularly loans. Gross interest payments are subject to VAT but borrowers are not entitled to input tax credits. Loans structured as alternative transactions such as finance leases may be treated as ordinary taxable supplies that give rise to input tax credits. Transitional rules were adopted for supplies of immovable property but not for other types of supplies.