Accountants must master new mainland VAT rules

by David Kwong

Peter Kung, senior partner, Shenzhen and head of China tax for Southern China and Hong Kong, KPMG
Photo: Johnson Poon

Changes seen as response to international pressure

The mainland's huge and still growing trade surplus has attracted considerable attention in both the United States and Europe, leading to calls for an appreciation of the yuan, as well as the threat of quotas or anti-dumping duties on key commodities.

In what is seen as a bid to avert or defer these possibilities, the Chinese government has recently introduced alternative measures, which they hope will have the same effect by reducing the competitiveness of certain mainland-manufactured products in international markets.

"They hope adjustment of export VAT refund rates will serve the same purpose," says Peter Kung, KPMG's senior partner for Shenzhen and head of China tax for Southern China and Hong Kong. "The difference, though, is that the Chinese government will collect some tax revenues, so it is quite a clever way to answer to the international pressure."

Basically, the recent developments have involved five government departments co-operating to abolish export VAT refunds for 258 types of product. The new regulations are applicable nationwide and have been made effective from 15 September 2006. That means any export declared to the customs authorities after that date will be subject to the new rules. However, some exports can still enjoy the old rates, provided they meet certain conditions. To qualify for this, the relevant export contract must have been signed before mid-September; filed with the appropriate tax authority by the end of September; and the relevant goods declared for export on or before 14 December.

Most of the items concerned fall into one of three clear categories. Broadly speaking, they are either mineral products, those creating a high level of energy consumption or pollution in the manufacturing process, or product that consume non-renewable natural resources.

Too hot

In parallel, the rates for export VAT refunds are being reduced for products in other industries considered to be "overheating". Thus, the refund rate for some steel products will be cut from the previous 11 per cent to eight per cent. For textiles and furniture, it will go from 13 per cent to eight per cent, as a result increasing total costs for exporters.

At this stage, Mr Kung is cautious about predicting the likely effects of these moves. "The bottom line is that it has driven up the costs for some industries, but it may still be competitive for them to manufacture in China," he says. "When companies compare costs and efficiencies with countries like Vietnam, India or Bangladesh, and then take into account logistics and the ease of arranging exports, they may decide the mainland is still very competitive."

As part of the same adjustment process, the VAT refund rate will actually be increased for various categories of high-tech and agricultural products. For example, to boost the export of biomedical and IT equipment, companies will now receive a full 17 per cent refund, rather than the previous level of 13 per cent.

"This is to encourage the higher value-added industries, while also discouraging those with less added value or which are less environmentally friendly," Mr Kung explains.

He notes that it is very difficult to estimate the total revenues involved. However, VAT is currently the largest single source of tax revenue in China and, in 2005, accounted for approximately one third of total tax collected.

Close watch

"The government will keep a close eye on it," Mr Kung adds. "Also, if too many industries feel they are being unfairly hit, they will lobby the authorities and ask for reconsideration. That is only natural."

He also points out that, in view of the need to keep people in employment, the Chinese government does not really want to see any industries losing out. However, it has recognised that something must be done to offset international criticism.

"In effect, they have a league table," Mr Kung explains. "So, if they have to 'sacrifice' something, it is the industries ranked at the bottom. They will then wait and see how the action taken affects trade and money flows. Ultimately, though, China still needs its processing trade and I don't think the government will put at risk a model of operation which has brought such success in the last two decades."

In terms of overall opportunities in the accountancy profession, Mr Kung says that KPMG's China practice has seen an annual increase in headcount of 30 to 40 per cent in the last few years. He estimates that at least 1,000 mainland graduates, as well as experienced practitioners, will be taken on in 2007, and expects the other Big Four firms to have comparable demand.

"It is not always easy to find the right calibre of people," he says. "However, as from next year, it will be possible to take the mainland's certified tax agent's exam in Hong Kong and this will be a good way for local people to learn more about the China tax system."


  • Mainland authorities abolishing export VAT refunds for 258 product types
  • Refund rates reduced for certain "overheating" industries
  • To promote preferred sectors, rates favourably adjusted for high-tech, biomedical and agricultural exports
  • Effects of the measures on overall trade will be closely monitored

Taken from Career Times 26 January 2007
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