vat reforms-it-consulting-intercompany-services-slides-201205
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VAT Reforms in China IT, consulting, advertising & intercompany services, May 2012 (KPMG China Presentation slides)TRANSCRIPT
VAT Reforms in China IT consulting advertising amp intercompany services
KPMG in China
Lachlan Wolfers and Roger Di
May 2012
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
2
Pre-reforms
Business Tax
Consumption Tax
VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
3
Post-reforms
Business Tax
Consumption Tax
VAT
bull Asset Leasing bull Goods bull Transportation bull Modern Services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
4
Indirect tax reforms
Expansion by scope likely in 2013 Financial Services
Real Estate amp Construction
Entertainment Post amp
Telecoms
Chongqing
Shenzhen
Shanghai
Jiangsu
Tianjin Beijing
2013 Jiangsu and Anhui
Beijing 1 Sept 2012
Shanghai 1 Jan 2012
1 Nov 2012
Fujian and Guangdong (including Shenzhen)
1 Dec 2012
2013 and after
Tianjin Zhejiang and Hubei
1 Oct 2012
The remaining cities and provinces in China
Beijing
Tibet
Jiangxi Fuj
ian
Tianjin
Anhui
Shanghai
Zhejiang
Fujian
Guangdong
Hubei
Jiangsu
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
6
VAT reform decision matrix
VAT Liability
Place of supply
Services Registration
Concessions
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
2
Pre-reforms
Business Tax
Consumption Tax
VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
3
Post-reforms
Business Tax
Consumption Tax
VAT
bull Asset Leasing bull Goods bull Transportation bull Modern Services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
4
Indirect tax reforms
Expansion by scope likely in 2013 Financial Services
Real Estate amp Construction
Entertainment Post amp
Telecoms
Chongqing
Shenzhen
Shanghai
Jiangsu
Tianjin Beijing
2013 Jiangsu and Anhui
Beijing 1 Sept 2012
Shanghai 1 Jan 2012
1 Nov 2012
Fujian and Guangdong (including Shenzhen)
1 Dec 2012
2013 and after
Tianjin Zhejiang and Hubei
1 Oct 2012
The remaining cities and provinces in China
Beijing
Tibet
Jiangxi Fuj
ian
Tianjin
Anhui
Shanghai
Zhejiang
Fujian
Guangdong
Hubei
Jiangsu
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
6
VAT reform decision matrix
VAT Liability
Place of supply
Services Registration
Concessions
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
2
Pre-reforms
Business Tax
Consumption Tax
VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
3
Post-reforms
Business Tax
Consumption Tax
VAT
bull Asset Leasing bull Goods bull Transportation bull Modern Services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
4
Indirect tax reforms
Expansion by scope likely in 2013 Financial Services
Real Estate amp Construction
Entertainment Post amp
Telecoms
Chongqing
Shenzhen
Shanghai
Jiangsu
Tianjin Beijing
2013 Jiangsu and Anhui
Beijing 1 Sept 2012
Shanghai 1 Jan 2012
1 Nov 2012
Fujian and Guangdong (including Shenzhen)
1 Dec 2012
2013 and after
Tianjin Zhejiang and Hubei
1 Oct 2012
The remaining cities and provinces in China
Beijing
Tibet
Jiangxi Fuj
ian
Tianjin
Anhui
Shanghai
Zhejiang
Fujian
Guangdong
Hubei
Jiangsu
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
6
VAT reform decision matrix
VAT Liability
Place of supply
Services Registration
Concessions
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
3
Post-reforms
Business Tax
Consumption Tax
VAT
bull Asset Leasing bull Goods bull Transportation bull Modern Services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
4
Indirect tax reforms
Expansion by scope likely in 2013 Financial Services
Real Estate amp Construction
Entertainment Post amp
Telecoms
Chongqing
Shenzhen
Shanghai
Jiangsu
Tianjin Beijing
2013 Jiangsu and Anhui
Beijing 1 Sept 2012
Shanghai 1 Jan 2012
1 Nov 2012
Fujian and Guangdong (including Shenzhen)
1 Dec 2012
2013 and after
Tianjin Zhejiang and Hubei
1 Oct 2012
The remaining cities and provinces in China
Beijing
Tibet
Jiangxi Fuj
ian
Tianjin
Anhui
Shanghai
Zhejiang
Fujian
Guangdong
Hubei
Jiangsu
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
6
VAT reform decision matrix
VAT Liability
Place of supply
Services Registration
Concessions
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
4
Indirect tax reforms
Expansion by scope likely in 2013 Financial Services
Real Estate amp Construction
Entertainment Post amp
Telecoms
Chongqing
Shenzhen
Shanghai
Jiangsu
Tianjin Beijing
2013 Jiangsu and Anhui
Beijing 1 Sept 2012
Shanghai 1 Jan 2012
1 Nov 2012
Fujian and Guangdong (including Shenzhen)
1 Dec 2012
2013 and after
Tianjin Zhejiang and Hubei
1 Oct 2012
The remaining cities and provinces in China
Beijing
Tibet
Jiangxi Fuj
ian
Tianjin
Anhui
Shanghai
Zhejiang
Fujian
Guangdong
Hubei
Jiangsu
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
6
VAT reform decision matrix
VAT Liability
Place of supply
Services Registration
Concessions
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
6
VAT reform decision matrix
VAT Liability
Place of supply
Services Registration
Concessions
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
6
VAT reform decision matrix
VAT Liability
Place of supply
Services Registration
Concessions
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
7
VAT pilot scheme ndash industries amp rates
Industry VAT Rate
Leasing of tangible movable property
17
Transportation services
11
Research and development (RampD) 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
8
VAT pilot scheme ndash scope of services
RampD and technical services includes
RampD services technology transfer services technical consulting services energy contract management engineering reconnaissance and exploration services
Scope Definition
RampD 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
9
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
10
VAT pilot scheme ndash 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
11
VAT pilot scheme ndash 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 partys 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
12
RMB 5 million (US$800000) annual sales
income
Compulsory
Optional
Registration
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
13
Place of supply - domestic
Location of supplier Location of services VAT or BT
In a cityprovince subject to the VAT pilot program
In a cityprovince subject to the VAT pilot program
VAT
In a cityprovince 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 cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
14
Place of supply - cross border
Location of supplier Location of recipient place of consumption
VAT treatment
In a cityprovince subject to the VAT pilot program
Outside China Zero rated or exempt
Outside China In a cityprovince 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
15
Key VAT implications for cross border services
Exports
Imports
Services consumed wholly outside of China
bull foreign entities providing services to Chinese entities which are fully provided and consumed outside China
bull foreign entities leasing tangible goods to Chinese entities where the goods are entirely used outside China
Output VAT Creditable input VAT
Zero - rating No
Yes
Exempt No No
Output VAT Creditable input VAT
Agent or purchaser Withholding of VAT Yes if general VAT taxpayer
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
16
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
RampD and technical services
bull RampD and design services provided to overseas entities
bull Engineering as well as exploration services with the related project or mineral resources located outside mainland China
bull 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 bull Software services circuit design and testing services business process management services provided to overseas entities
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
17
Exported Services ndash Circular 131
Industry VAT treatment
VAT zero-rating VAT exemption
Cultural and creative services
bull Design services provided to overseas entities (except for design services in relation to immovable property located in mainland China)
bull Convention and exhibition services located outside mainland China
bull Trademark and copyright transfer services
intellectual property services provided to overseas entities
bull Advertising services where the related
advertisement is released outside mainland China
Certification and consulting services
bull Certification verification and consulting services provided to overseas entities (except for services in relation to goods or immovable property located in mainland China)
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
18
Procedures for claiming zero rating for exported services
Announcement 13 applies to businesses that export international transportation services RampD services and design services under the VAT pilot program Business must be granted ldquoexempt credit refundrdquo (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
RampD services
bull Bank account permitlicense
bull Registration certificate of technology export contract
bull ECR Return Application bull Zero-rated Taxable Services (RampD Design Services) Tax-exempt Refund
Application Detail Tables (form yet to be released) bull Current period VAT Return bull Tax-exempt Refund Application Official Electronic Data bull The following original certificates
minus Registration Certificate of Technology Export Contract applicable to the RampD or design services provided to the foreign enterprise (copy only)
minus The RampD or design services contract pertaining to the zero-rated VAT services provided
minus Invoice for zero-rated services minus Detailed Breakdown of Revenues Received From Providing RampD and
Design Services provided to Foreign Entities (form yet to be released) minus Other documents capable of reflecting and certifying revenue
composition received in relation to the agreed RampD or Design service contracts
minus Other certificates as requested by the competent tax authorities
Design services
bull Bank account permitlicense
bull Registration Certificate of Technology Export Contract
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
19
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
20
Other concessions
Concession VAT treatment Input VAT credits
Technology transfers by pilot taxpayers
Exempt from VAT No
Offshore outsourcing services by businesses registered in citiesprovinces 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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
22
Implications for businesses - industry specific rules
General rule
Specific rule for taxpayers who previously paid BT on a net basis
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Gross basis Gross revenue x 6 VAT
Income VAT liability
VAT payable Output VAT ndash input VAT
Output VAT Net basis (Gross revenue ndash allowable deduction) (1 + VAT rate) x VAT rate
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
23
IT industry example
Beijing Co sells software products
bull VAT applies at rate of 17
bull refund where tax burden gt3 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
bull may generate additional input VAT credits
minus this reduces tax burden
minus this reduces the refund
bull therefore there is no real benefit from the VAT reforms
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
24
IT industry example - royalty
Royalty
Licence of IP rights
VAT withholding 6 Gross up for VAT
WHT on VAT-inclusive amount
Cash flow
VAT pilot program
Software Co
US Head Office
Service flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
25
IT industry example ndash maintenance v repair
Sale of equipment ndash
17 VAT
bull Previously incentive to characterise maintenance as a service not a repair
bull Now is maintenance service subject to 6 VAT or 17 VAT
bull When does it matter
Customer VAT
pilot program IT Co
Provision of maintenance services
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
26
Advertising example - agency in a city subject to the VAT pilot program
Gross income
6 output VAT
Advertising publication fee
Input VAT or
Revenue deduction
Cash flow
Customer
VAT pilot program
advertising agency
Advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
27
Advertising example - agency outside a city subject to the VAT pilot program
Gross income
5 BT
Advertising publication fee
BT deduction for fee only or
fee + VAT
Cash flow
Customer Non-VAT pilot
program advertising
agency
VAT pilot program
advertising publisher
(egmedia)
Invoice flow
Input VAT creditable
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
28
Intercompany support services example - imports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
29
Consulting services example - exports
City subject to the VAT pilot
program
Other branches
Tax authority
Head Office
Mainland China Overseas
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
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
31
Practical steps - impact of VAT reforms on profitability
BT Regime VAT Regime
Sales Revenue ($) 100
BT payable 5 5 NA
VAT ndash output ($) NA
Costs of Sales($) 80
VAT - input($) NA
Profit($) 15
Ensure cost savings of
suppliers is passed on
Tip 1 Try to pass on VAT
costs to customers
Seek to pass on VAT to
customers
Maximise input VAT credits
15
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
32
VAT Ready
Sourcing of services
IT systems
Training
Exports imports of services
Insourcing v outsourcing
Staff travel amp entertainment
Consumer Demand changes
Intragroup services
Registration amp Invoicing
Pricing ACrsquos payable
ACrsquos receivable
Contracts
Cashflow Supplier
Cost savings
Small scale taxpayers
VAT Ready
Supply chain
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
33
How do I implement reforms ndash timeline
bullVAT taxpayer registration bullInternal training for relevant functions bullFinancial impact study bullVAT invoice and reporting process design
Date of implementation
Month after implementation
Now
Now
Tax and IT advisory assistance
VAT effective on
1st of the month
First VAT filing
15th of following
month
Finance and Tax
IT bullBusiness system review and upgrade bullFinancial and tax system review and upgrade bullLinkages with Golden Tax System
bullUse new financial and tax system bullImplement new VAT invoice and reporting process bullmonitor the working flow bullFollow up on new rules
bullReview contract terms ndash can VAT be passed on bullWhere VAT cannot be passed on can you renegotiate bullAmending standard contracts to allow for VAT pass on
bullAssess pricing implications bullReview current vendor status (assess their savings) bullCommunicate and negotiate with customers and vendors
Business
Legal
work TOGETHER
to get VAT READY
First
VAT return 1st ndash end of
month
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
35
Contracts
If the contract is silent no VAT
can be on-charged to the purchaser
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
36
Major risks or issues ndash contracting and cost saving impacts
1) Existing contracts bull 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
bull Leases of tangible movable property entered into prior to the implementation of the VAT pilot program ndash remain subject to BT
bull If the contract allows for entitlement to pass on lsquoindirect taxesrsquo or lsquoturnover taxesrsquo will the supplier be able to pass on the VAT
2) New contracts bull If you are the supplier how do you ensure VAT can be recovered in addition to the contract price
bull If you are the purchaser
minus how do you ensure the supplier does not simply add on VAT to the price which already includes BT
minus 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
minus how do you ensure the supplier provides you with a special VAT invoice before you pay the VAT
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
37
Major risks or issues ndash registration amp invoicing
1) Key registration and invoicing issues to consider bull Is my business registered as a general VAT taxpayer or does it need to register now
bull If not is my business turnover sufficient to register
bull Will my business be subject to a monitoring period
bull What equipment does my business need to purchase to issue special VAT invoices Do my staff know how to use it
bull 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
bull Will my business only deal with other businesses which are registered as general VAT taxpayers
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
38
Major risks or issues ndash IT systems
1) Key issues to consider bull Do my IT and accounting systems recognise VAT
bull What tax codes does my accounting system recognise
bull Output VAT codes - 0 (exempt) 6 (new VAT rate) 11 (new VAT rate) 13 (foodstuffs and other items) and 17 (general VAT rate)
bull 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
bull How do my systems link in with the golden tax system
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
39
Major risks or issues ndash supply chain
1) Key supply chain issues to consider bull Consider the current legal structure ndash what aspects of that structure are superfluous How could things
be rationalised or improved
bull Assuming no cascading of BT what aspects of my supply chain can now be removed
bull Absent BT is my supply chain most effective from a trade and customs perspective
bull How does my renewed supply chain impact on transfer pricing
bull 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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
40
Major risks or issues ndash cash flow and training
1) Key cashflow impacts bull Can my business fund an increase in VAT on services (up from 3 or 5)
bull What are my payment terms for accounts receivable Do I pay VAT before I receive it
bull What terms does my business pay accounts payable Do I get a special VAT invoice at or before I pay the VAT component
bull Is there a net cashflow deficiency
bull When borrowing to fund major acquisitions will I be able to get short-term financing of VAT component
bull How do the VAT reforms impact on internal budgeting ndash ie VAT inclusive or VAT exclusive
2) Key training considerations bull Who in my organisation needs to know about these reforms
bull What about the impact on staff in the finance function Acrsquos receivable and acrsquos payable function
bull For foreign MNCs what about head office training
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
42
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
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
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
43
Implementation opportunities ndash 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 ndash 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 ndash 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 ndash hence left until later
Transition to a new system ndash always
produces winners and losers ndash the key to
being a winner is to be prepared
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Agenda
bull Setting the scene
bull How the VAT pilot program operates
bull Specific implications for businesses
bull Practical steps
bull Major risk areas or issues
bull Opportunities
bull How KPMG can help you
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
45
How KPMG is assisting its clients
Preparation
bull lsquoVAT Preparersquo report
bull Financial impact assessment
bull Contract reviews
Implementation
bull Project management
bull Key supplier arrangements
bull Key customer arrangements
bull Preparation of standard procedures
bull Training
bull IT systems
Compliance
bull Preparation of VAT returns
bull Engagement with tax authorities
bull Application for VAT exemptions or zero rating for exported services
bull Apportionment of input VAT credits
bull Post-implementation health checks
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
46
Contact
Lachlan Wolfers Leader KPMG Centre of Excellence Indirect Taxes KPMG China +86 (21) 2212 3515 lachlanwolferskpmgcom
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved
47
Contact
Roger Di Partner Tax KPMG China +86 (10) 8508 7512 rogerdikpmgcom
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
Thank you
Presentation by Lachlan Wolfers and Roger Di
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-
copy 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 ldquocutting through complexityrdquo 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
- Slide Number 1
- Agenda
- Pre-reforms
- Post-reforms
- Indirect tax reforms
- Agenda
- VAT reform decision matrix
- VAT pilot scheme ndash industries amp rates
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- VAT pilot scheme ndash scope of services
- Slide Number 13
- Place of supply - domestic
- Place of supply - cross border
- Key VAT implications for cross border services
- Exported Services ndash Circular 131
- Exported Services ndash Circular 131
- Procedures for claiming zero rating for exported services
- Procedures for claiming exemption for services
- Other concessions
- Agenda
- Implications for businesses - industry specific rules
- IT industry example
- Slide Number 25
- Slide Number 26
- Slide Number 27
- Slide Number 28
- Intercompany support services example - imports
- Consulting services example - exports
- Agenda
- Practical steps - impact of VAT reforms on profitability
- Slide Number 33
- How do I implement reforms ndash timeline
- Agenda
- Contracts
- Major risks or issues ndash contracting and cost saving impacts
- Major risks or issues ndash registration amp invoicing
- Major risks or issues ndash IT systems
- Major risks or issues ndash supply chain
- Major risks or issues ndash cash flow and training
- Agenda
- Opportunities that the reforms present
- Implementation opportunities ndash practical tips from other countries
- Agenda
- How KPMG is assisting its clients
- Slide Number 47
- Slide Number 48
- Thank you
- Slide Number 50
-