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VAT Reforms in China IT, consulting, advertising & intercompany services, May 2012 (KPMG China Presentation slides)

VAT Reforms in China IT, consulting, advertising & intercompany services, May 2012 (KPMG China Presentation slides)

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Vat reforms-it-consulting-intercompany-services-slides-201205 Presentation Transcript

  • 1. VAT Reforms in China IT, consulting, advertising & intercompany services KPMG in China Lachlan Wolfers and Roger Di May 2012
  • 2. Agenda • Setting the scene • How the VAT pilot program operates • Specific implications for businesses • Practical steps • Major risk areas or issues • Opportunities • How KPMG can help you
  • 3. Pre-reforms VAT Business Tax Consumption Tax © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2
  • 4. Post-reforms VAT • • • • Business Tax Asset Leasing Goods Transportation Modern Services Consumption Tax © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
  • 5. Indirect tax reforms 1 Jan 2012 Shanghai Beijing 1 Sept 2012 Beijing Tianjin Tianjin Anhui Jiangsu Tib et Shanghai Shanghai Zhejiang Chongqing Jian gxi Fuj ian Fujian Jiangsu Beijing 1 Oct 2013Jiangsu and Anhui 2012 1 Nov 2012 Fujian and Guangdong (including Shenzhen) 1 Dec 2012 Tianjin, Zhejiang and Hubei Guangdong Shenzhen Hubei Expansion by scope likely in 2013: Financial Services Real Estate & Construction 2013 and after The remaining cities and provinces in China Entertainment © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Post & Telecoms 4
  • 6. Agenda • Setting the scene • How the VAT pilot program operates • Specific implications for businesses • Practical steps • Major risk areas or issues • Opportunities • How KPMG can help you
  • 7. VAT reform decision matrix Services Registration VAT Liability? Concessions © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Place of supply 6
  • 8. VAT pilot scheme – industries & rates Industry VAT Rate Leasing of tangible movable property 17% Transportation services 11% Research and development (R&D) and technical services 6% Information technology (IT) services 6% Cultural and creative services 6% Logistics and ancillary services 6% Certification and consulting services 6% Small scale VAT taxpayers 3% © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7
  • 9. VAT pilot scheme – scope of services R&D and technical services includes: R&D services, technology transfer services, technical consulting services, energy contract management, engineering, reconnaissance and exploration services Scope Definition R&D services Research, experiment and development of new technology, new products, new techniques or new materials and the related systems Technology transfer services Transfer of the ownership or use right of patented or non-patented technologies Technical consulting services Feasibility study services, technology forecasting services, special technology survey services, analysis and evaluation report services and professional knowledge services for special technical projects Energy contract management Feasibility study services, technology forecasting services, special technology survey services, analysis and evaluation report services and professional knowledge services for special technical projects Engineering, reconnaissance and exploration services Field surveys conducted for terrains, geological structure, underground resources conditions prior to mining and project constructions © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8
  • 10. VAT pilot scheme – scope of services IT services includes: production, collection, process, storage, transportation, search and utilization of information via computers and communication networks and provision of such information services, including software services, circuit design and testing services, information system services and operational flow management services Scope Definition Software services Provision of software development, consultation, maintenance and testing services Circuit design and testing services Provision of integrated electronic and circuit products design, testing services and relevant technical support services IT system services Provision of information system integration services, network management services, desktop management and maintenance services, information system application services, basic IT management platform integration services, IT related basic infrastructure management services, data centre, hosting centre and security services Operational flow management services IT based business activities related to the provision of HR management services, financial and economic management services, financial payment services, internal data analysis, call centre services and e-commerce services © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 9
  • 11. VAT pilot scheme – scope of services Cultural and creative services includes: design services, trademarks and copyrights transfer services, intellectual property services, advertising services, and convention and exhibition services Scope Definition Design services Projecting the plan, program and idea through visual, text and other forms, including industrial design, style design, fashion design, environmental design, graphic design, packaging design, animation design, exhibition design, website design, mechanical design, engineering design and creative planning Intellectual property services Dealing with intellectual property matters, including agency, registration, verification, evaluation, certification, consulting, search services for patents, trademarks, copyrights, software and integrated circuit design Advertising services Propaganda and related services for goods, business services, cultural and sports programs, notices, announcements, and other matters entrusted by the client through books, newspapers, magazines, radio, television, film, slides, signs, posters, window display, neon signs, light boxes, Internet and other various media Convention and exhibition services Facilitating commodity circulations, promotions, shows, business and trade discussions, non-governmental exchanges, enterprise communications and international exchanges © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10
  • 12. VAT pilot scheme – scope of services Certification and consulting services includes: certification services, verification services, and consulting services Scope Definition Certification services Activities where qualified professional institutions use detection, inspection, measurement techniques to prove that products, services, management systems comply with the relevant technical specifications and technical specifications in compliance with certain mandatory requirements or standards Verification services Activities where qualified professional institutions assess the commissioning party's economic activities and relevant information, and issue probative opinions, including accounting, taxation, asset valuation, lawyers, real estate and land evaluation and construction costs reports Consulting services Activities to provide information or recommendation on finance, tax, legal, internal management, operations and process management © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11
  • 13. Registration Compulsory RMB 5 million (US$800,000) annual sales income Optional © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 12
  • 14. Place of supply - domestic Location of supplier Location of services VAT or BT In a city/province subject to the VAT pilot program In a city/province subject to the VAT pilot program VAT In a city/province subject to the VAT pilot program Elsewhere in China BT, but credit allowed against VAT payable (very limited application in practice) Elsewhere in China In a city/province subject to the VAT pilot program BT Elsewhere in China Elsewhere in China BT Rule of thumb: If you paid BT previously, and those same services are now within the scope of the pilot program, then you now pay VAT. It does not matter where the customer is located in China © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13
  • 15. Place of supply - cross border Location of supplier Location of recipient / place of consumption VAT treatment In a city/province subject to the VAT pilot program Outside China Zero rated or exempt Outside China In a city/province subject to the VAT pilot program If no agent, recipient may claim input VAT credit subject to documentary requirements Outside China Services consumed wholly outside China Not subject to VAT Outside China Leased goods used entirely outside China Not subject to VAT © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 14
  • 16. Key VAT implications for cross border services Exports: Output VAT Creditable input VAT Zero - rating No Yes Exempt No No Imports: Output VAT Agent or purchaser Creditable input VAT Withholding of VAT Yes, if general VAT taxpayer Services consumed wholly outside of China: • foreign entities providing services to Chinese entities which are fully provided and consumed outside China • foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15
  • 17. Exported Services – Circular 131 Industry VAT treatment VAT zero-rating R&D and technical services VAT exemption • R&D and design services provided to overseas entities • Engineering as well as exploration services with the related project or mineral resources located outside mainland China • Technology transfer, technology consulting, energy management services (except where the object of the energy management contract is located in mainland China) provided to overseas entities IT services • Software services, circuit design and testing services, business process management services provided to overseas entities © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 16
  • 18. Exported Services – Circular 131 Industry VAT treatment VAT zero-rating Cultural and creative services • Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China) VAT exemption • Convention and exhibition services located outside mainland China • Trademark and copyright transfer services, intellectual property services provided to overseas entities • Advertising services where the related advertisement is released outside mainland China Certification and consulting services • Certification, verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China) © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 17
  • 19. Procedures for claiming zero rating for exported services Announcement 13 applies to businesses that export international transportation services, R&D services; and design services under the VAT pilot program. Business must be granted “exempt, credit, refund” (ECR) status before they can commence submitting VAT refund reports and applying for zero rated VAT refunds or credits. They must also comply with the following: Service provided Approval procedures Zero rated VAT refund or credit documentation requirements R&D services • Bank account permit/license • Registration certificate of technology export contract Design services • Bank account permit/license • Registration Certificate of Technology Export Contract • ECR Return / Application • Zero-rated Taxable Services (R&D, Design Services) Tax-exempt Refund Application Detail Tables (form yet to be released) • Current period VAT Return • Tax-exempt Refund Application Official Electronic Data • The following original certificates: − Registration Certificate of Technology Export Contract applicable to the R&D or design services provided to the foreign enterprise (copy only) − The R&D or design services contract pertaining to the zero-rated VAT services provided − Invoice for zero-rated services − Detailed Breakdown of Revenues Received From Providing R&D and Design Services provided to Foreign Entities (form yet to be released) − Other documents capable of reflecting and certifying revenue composition received in relation to the agreed R&D or Design service contracts − Other certificates as requested by the competent tax authorities © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18
  • 20. Procedures for claiming exemption for services The tax authorities in Shanghai have not yet published the documentation requirements for claiming exemption from VAT: 1) Circular 111 only contemplates procedures being issued by the Ministry of Finance / State Administration of Taxation for zero rating, not exemption. 2) Some taxpayers are being asked to pay VAT on exported services, with a refund to be given when the procedures are published and satisfied. 3) Other taxpayers are being asked to self-assess eligibility for exemption. The Changning District Tax Bureau in Shanghai have issued procedures for taxpayers located in its boundaries. Taxpayers must provide the following in order for the exported service to be exempt from VAT:  the application form;  the contract;  foreign income transaction records;  receipts; and  any other requested documents © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 19
  • 21. Other concessions Concession VAT treatment Technology transfers by pilot taxpayers Exempt from VAT No Offshore outsourcing services by businesses registered in cities/provinces subject to the VAT pilot program Exempt from VAT No Pipeline transportation services VAT levy first and refund later for VAT burden in excess of 3% Yes Approved finance leases VAT levy first and refund later for VAT burden in excess of 3% Yes © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Input VAT credits 20
  • 22. Agenda • Setting the scene • How the VAT pilot program operates • Specific implications for businesses • Practical steps • Major risk areas or issues • Opportunities • How KPMG can help you
  • 23. Implications for businesses - industry specific rules General rule: Income VAT liability VAT payable Output VAT – input VAT Output VAT Gross basis: Gross revenue x 6% VAT Specific rule for taxpayers who previously paid BT on a net basis: Income VAT liability VAT payable Output VAT – input VAT Output VAT Net basis: (Gross revenue – allowable deduction) / (1 + VAT rate) x VAT rate © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 22
  • 24. IT industry example Beijing Co sells software products: • VAT applies at rate of 17% • refund where tax burden >3% per Caishui [2011] 100 Beijing Co now generates input VAT credits from the payment of royalties As a result of the VAT reforms Beijing Co: • may generate additional input VAT credits: − this reduces tax burden − this reduces the refund • therefore, there is no real benefit from the VAT reforms © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 23
  • 25. IT industry example - royalty VAT withholding @ 6% Gross up for VAT WHT on VAT-inclusive amount? VAT pilot program Software Co Royalty U.S. Head Office Licence of IP rights Input VAT creditable Cash flow Service flow © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 24
  • 26. IT industry example – maintenance v repair Provision of maintenance services VAT pilot program IT Co. Customer Sale of equipment – 17% VAT • Previously, incentive to characterise maintenance as a service, not a repair • Now, is maintenance service subject to 6% VAT or 17% VAT? • When does it matter? © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 25
  • 27. Advertising example - agency in a city subject to the VAT pilot program Advertising publisher (e.g.media) Input VAT or Revenue deduction Gross income Customer 6% output VAT Advertising publication fee VAT pilot program advertising agency Input VAT creditable Cash flow Invoice flow © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 26
  • 28. Advertising example - agency outside a city subject to the VAT pilot program VAT pilot program advertising publisher BT deduction for fee only, or fee + VAT? Gross income Customer (e.g.media) Advertising publication fee Non-VAT pilot program advertising agency 5% BT Input VAT creditable Cash flow Invoice flow © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 27
  • 29. Intercompany support services example - imports Mainland China Overseas City subject to the VAT pilot program Head Office Tax authority Other branches Issues: Need to ensure service within the scope Gross up for VAT withholding Meet documentation requirements for claiming input VAT credit Interaction with transfer pricing © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 28
  • 30. Consulting services example - exports Mainland China Overseas City subject to the VAT pilot program Head Office Tax authority Other branches Issues: Need to ensure service within the scope of the pilot program Service must not relate to goods or real estate in mainland China Comply with procedures for claiming exemption Transfer out input VAT Interaction with transfer pricing © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 29
  • 31. Agenda • Setting the scene • How the VAT pilot program operates • Specific implications for businesses • Practical steps • Major risk areas or issues • Opportunities • How KPMG can help you
  • 32. Practical steps - impact of VAT reforms on profitability BT Regime VAT Regime Sales Revenue ($) 100 ? BT payable @ 5% 5 Tip 1: Try to Seek to pass on pass on VAT VAT to costs to customers customers N/A VAT – output ($) N/A ? Costs of Sales($) 80 ? VAT - input($) N/A ? 15 15 Ensure cost savings of suppliers is passed on Profit($) © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Maximise input VAT credits 31
  • 33. VAT Ready Sourcing of services Consumer Demand changes Staff travel & entertainment Intragroup services IT systems Supply chain Contracts VAT Ready Registration & Invoicing Supplier Cost savings Pricing A/C’s payable A/C’s receivable Cashflow Training Insourcing v outsourcing Small scale taxpayers Exports / imports of services © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 32
  • 34. How do I implement reforms – timeline Date of implementation Now Month after implementation •Use new financial and tax system •Implement new VAT invoice and reporting process •monitor the working flow •Follow up on new rules •VAT taxpayer registration Finance •Internal training for relevant functions and Tax •Financial impact study •VAT invoice and reporting process design •Assess pricing implications Business •Review current vendor status (assess their savings) •Communicate and negotiate with customers and vendors Legal IT work TOGETHER to get VAT READY •Review contract terms – can VAT be passed on •Where VAT cannot be passed on, can you renegotiate? •Amending standard contracts to allow for VAT pass on •Business system review and upgrade •Financial and tax system review and upgrade •Linkages with Golden Tax System Tax and IT advisory assistance Now VAT effective on 1st of the month © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. First VAT return 1st – end of month First VAT filing 15th of following month 33
  • 35. Agenda • Setting the scene • How the VAT pilot program operates • Specific implications for businesses • Practical steps • Major risk areas or issues • Opportunities • How KPMG can help you
  • 36. Contracts If the contract is silent, no VAT can be on-charged to the purchaser © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 35
  • 37. Major risks or issues – contracting and cost saving impacts 1) Existing contracts • If the contract is entered into prior to the reforms, and the price is inclusive of BT, will supplier have to absorb the VAT? Or can the supplier pass on the VAT? • Leases of tangible movable property entered into prior to the implementation of the VAT pilot program – remain subject to BT • If the contract allows for entitlement to pass on ‘indirect taxes’ or ‘turnover taxes’, will the supplier be able to pass on the VAT? 2) New contracts • If you are the supplier: how do you ensure VAT can be recovered in addition to the contract price? • If you are the purchaser: − how do you ensure the supplier does not simply add on VAT to the price which already includes BT? − how do you ensure the supplier passes on the benefit of the cost savings arising from the removal of BT and the availability of input VAT credits? − how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT? © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 36
  • 38. Major risks or issues – registration & invoicing 1) Key registration and invoicing issues to consider • Is my business registered as a general VAT taxpayer, or does it need to register now? • If not, is my business turnover sufficient to register? • Will my business be subject to a monitoring period? • What equipment does my business need to purchase to issue special VAT invoices? Do my staff know how to use it? • What is the lead time for registering and obtaining approval and equipment for issuing special VAT invoices? Will my business be ready for the implementation of the VAT pilot program? • Will my business only deal with other businesses which are registered as general VAT taxpayers? © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 37
  • 39. Major risks or issues – IT systems 1) Key issues to consider • Do my IT and accounting systems recognise VAT? • What tax codes does my accounting system recognise? • Output VAT codes - 0% (exempt), 6% (new VAT rate), 11% (new VAT rate), 13% (foodstuffs and other items) and 17% (general VAT rate); • Input VAT rates - 0% (ineligible for VAT credit), 3% (where obtain a special invoice issued by tax authorities for small scale taxpayers), 6% (new VAT rate), 7% (purchase of transportation services from small scale taxpayers by general VAT taxpayers),11% (new VAT rate), 13% (foodstuffs and other items), 17% (general VAT rate), export refund rates • How do my systems link in with the golden tax system? © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 38
  • 40. Major risks or issues – supply chain 1) Key supply chain issues to consider • Consider the current legal structure – what aspects of that structure are superfluous? How could things be rationalised or improved? • Assuming no cascading of BT, what aspects of my supply chain can now be removed? • Absent BT, is my supply chain most effective from a trade and customs perspective? • How does my renewed supply chain impact on transfer pricing? • Does my supply chain model consider the concept of unbundling non-dutiable costs from my customs value such as commissions or service fees paid to buying agents for the sourcing of products? © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 39
  • 41. Major risks or issues – cash flow and training 1) Key cashflow impacts • Can my business fund an increase in VAT on services (up from 3% or 5%) • What are my payment terms for accounts receivable? Do I pay VAT before I receive it? • What terms does my business pay accounts payable? Do I get a special VAT invoice at or before I pay the VAT component? • Is there a net cashflow deficiency? • When borrowing to fund major acquisitions, will I be able to get short-term financing of VAT component? • How do the VAT reforms impact on internal budgeting – i.e. VAT inclusive or VAT exclusive? 2) Key training considerations • Who in my organisation needs to know about these reforms? • What about the impact on staff in the finance function? A/c’s receivable and a/c’s payable function • For foreign MNCs, what about head office training? © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 40
  • 42. Agenda • Setting the scene • How the VAT pilot program operates • Specific implications for businesses • Practical steps • Major risk areas or issues • Opportunities • How KPMG can help you
  • 43. Opportunities that the reforms present Consider whether it is preferable to acquire services from businesses subject to the VAT pilot program (for which an input VAT credit may apply) in preference to acquiring services from businesses in other parts of mainland China (for which irrecoverable BT is likely to apply). This preference is only likely to apply for the period until the reforms are expanded across mainland China Deferring the purchase of fixed assets so as to qualify for input VAT credits on fixed assets purchased once the reforms commence. Caution should be exercised before artificially terminating existing contracts or purchase orders, or returning fixed assets recently acquired. © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Deferring the purchase of non-essential services to ensure that any new services being acquired are subject to VAT. This is especially true in the case of related party services. Importantly though, it may not be sufficient to simply defer payment if there is a contract that provides for an earlier payment date. 42
  • 44. Implementation opportunities – practical tips from other countries Significant tax reforms like this are a key management issue, not simply a tax issue Need to start preparing now – this includes taxpayers not subject to the pilot program the reforms are inevitable Obtain a budget to prepare for the reforms Put together a key team – project leader + key external advisers Consider the impact on IT systems, accounting systems and processes, pricing, contracts, consumer demand, cashflow management Businesses who provide services are likely to suffer increased strain on cashflow Financial services and real estate are often problematic under VAT – hence left until later Transition to a new system – always produces winners and losers – the key to being a winner is to be prepared © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 43
  • 45. Agenda • Setting the scene • How the VAT pilot program operates • Specific implications for businesses • Practical steps • Major risk areas or issues • Opportunities • How KPMG can help you
  • 46. How KPMG is assisting its clients Preparation • ‘VAT Prepare’ report • Financial impact assessment • Contract reviews Implementation Compliance • Project management • Preparation of VAT returns • Key supplier arrangements • Engagement with tax authorities • Key customer arrangements • Application for VAT exemptions or zero rating for exported services • Preparation of standard procedures • Training • IT systems • Apportionment of input VAT credits • Post-implementation health checks © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 45
  • 47. Contact Lachlan Wolfers Leader, KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlan.wolfers@kpmg.com © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 46
  • 48. Contact Roger Di Partner, Tax KPMG China +86 (10) 8508 7512 roger.di@kpmg.com © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 47
  • 49. Thank you Presentation by Lachlan Wolfers and Roger Di
  • 50. © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.