On 24 March 2016 China’s Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issues Circular Caishui [2016] 36 (Circular36) which contains the value Added Tax (VAT) rates & rules applicable to the expansion of China’s VAT system to several key sectors such as real estate and construction, financial services, and lifestyle services, which take effect from 1 May 2016.

While the VAT rules must be implemented in a very short space of time, Tianyuan Tax Certified Tax Agents Company is very proud to have been involved in the consultation process for different sizes of enterprises and for both domestic business and international business. Since last year, and through our efforts and international and local experience, we have been able to pre-empt with remarkable accuracy many of the rules now released, and in doing so we have successfully assisted numbers of companies to prepare for these changes for some time.

The Tianyuan Chinese Tax Alert provides an overview of the high level policies and general impacts across all industries. In additional to this, at the same time we are also issuing specific alerts for each of the three major industries affected by these changes, for ease of reference. Importantly though, each of the alerts should be read together, given that businesses across all sectors may buy, sell or lease real estate assets, and businesses across all sectors may consume lifestyle services as well as financial services. In other words, the industry specific alerts focus not only on the service providers in those industries, but also the consumers of services in those industries.

These alerts have been prepared within an exceptionally short period of time of release of 95 pages of detailed rules contained in Circular 36. As such, they present our preliminary thoughts or impressions only.

China’s indirect tax system has for many years now, been a bifurcated system with VAT broadly applying to the goods sector, and Business Tax (BT) applying to the service sector. Given that BT is essentially a tax on business which cascades throughout a supply chain, and which is generally regarded as being an inefficient form of taxation, the Chinese government has been embarking upon a program of progressively replacing BT with VAT since 2012. While the early stages of the VAT reform program involved the VAT rules for certain sectors being implemented progressively on a province by province basis, in more recent times the implementation of VAT has been done nationwide on an industry-by-industry basis.