The Chinese authorities are bringing in significant changes to their federal indirect tax systems which could result in businesses being paid less than the amount they have invoiced customers in China for.
Up until now, value added tax (VAT) in China has only been applied to transactions in goods and a limited range of manufacturing-related services. Most other services have been subject to business tax.
But from today, China’s VAT base will be significantly extended as a broad range of services will cease to be liable to business tax, but will become subject to VAT.
The move could affect many UK firms trading in China, which is an increasingly important market for Scotland, with exports there rising by 43 per cent to £530 million between 2010 and 2014.
Jim Burberry, Edinburgh-based VAT partner at accountancy group RSM, warned: “China is now Scotland’s top export location in Asia and unless appropriate action is taken the Chinese VAT reforms could result in Scottish businesses making supplies of qualifying services in China actually being paid less than the invoiced value of the services.”
Burberry said that in common with most sales tax systems, changes to the Chinese VAT provisions will affect non-resident service providers, particularly those involved in real estate, construction, financial and insurance services and “lifestyle” services such as medical and healthcare, education, food and beverage, hospitality and entertainment services.
“In general, a business with no establishment in China undertaking taxable activities in China is unable to register and account for VAT. Under the new VAT reforms, a withholding procedure will be introduced.
“Unless existing contracts specifically state that the fee payable is exclusive of any tax that may become due and payable, a proportion of the value of the service provided, equivalent to the VAT, will be withheld by the Chinese customer and paid to the Chinese tax authorities.”
Burberry said it was important for businesses to take advice on the extent to which the service is of a type which will become subject to the new Chinese regulations.
Contracts may need to be renegotiated, or agreement reached that the invoiced value can be increased.
According to UK Trade & Investment, UK exports of goods to China have more than doubled since 2010. They were worth £14.1 billion in 2014, making China the UK’s sixth largest export market. The UK is now the second biggest European exporter to China.