Managing China’s VAT risks and opportunities
China’s VAT system is one of the most complex in the world. Although companies generally assume that VAT in China is “neutral”, in reality they are often net payers of VAT and can incur significant amount of VAT related costs. Our China VAT survey looks at the country’s VAT regime and how to effectively manage VAT risks and opportunities.
Over 550 China professionals interested in VAT1 responded to our survey. Key findings are as follows:
The China VAT myth — not just a low risk “pass through” tax
- Almost 70% of respondents said that VAT risks were higher or similar to corporate tax, an area where most companies have dedicated resources.
- Some respondents believe VAT carries inherently lower risk levels because the VAT related accounts are netted together under the Tax Payable — VAT Payable sub-account and the resulting balance may fall below a materiality threshold.
- Over 50% responded that the VAT opportunities were higher or similar to corporate tax while only 32% believed the opportunities were lower, indicating there are benefits waiting to be found.
We would assert that VAT may be one of a company’s largest tax risks with huge unknown costs. On the other hand, it may also be one of your largest unexplored tax opportunities.
Changing VAT regulatory landscape
- More than 76% of respondents said they were not closely monitoring the regulatory changes or needed more time and assistance to understand how the changes impact the organization.
- Over 85% of respondents welcomed the expansion of VAT to absorb BTable services, while 15% did not welcome the expansion because it required them to adapt to the changes.
The rules and regulations governing VAT and BT in China have been under continuous review for years and subject to frequent update and interpretation. It would be advisable to allocate more resources to be responsible for VAT so they can keep up to date and proactively address issues.
Major areas closely aligned?
- Only 16% of respondents have dedicated staff strategically managing the VAT function.
- 69% of respondents stated that they are not able to directly use their ERP or accounting data directly for VAT return processing.
- Nearly 80% would be very interested to increase the interaction with their in-charge VAT authority, showing that they are seeking even more guidance.
There are many different parts of the company that must be synchronized in order to have a compliant and efficient VAT operation.
Almost 80% of respondents are not confident that their processes are able to arrive at accurate VAT results. A lot of work remains for companies to improve confidence levels.
1 These were respondents who attended an Ernst & Young China seminar in 2011, covering only China VAT. Thus, most of the respondents were responsible for some portion of the VAT process in their organization.