Value Added Tax (VAT) in China is regarded as a neutral tax that permits businesses to offset contributions made on purchases or transactions related to their operations against their corresponding VAT rates. In China, VAT payers fall into two categories: general contributors and small contributors, determined based on their annual sales. Small taxpayers enjoy a reduced tax rate, while general taxpayers can deduct input VAT from output VAT.
In this article, we provide an in-depth overview of VAT and payroll obligations in China to ensure your compliance with local laws.
Determining the Applicable VAT Rate on an Invoice
The VAT rate in China varies depending on the nature of the activities involved. Here’s a breakdown:
- 13% for general trading
- 6% for services
- 3% (simplified small-scale VAT)
- 9% for Telecommunication and Agriculture
Understanding the distinction between these rates is crucial for businesses operating in China, as VAT serves as a system to monitor payments and prevent tax evasion. Moreover, it’s essential to grasp the two different types of “fapiao,” which play a pivotal role in the Chinese tax system.
Changes in VAT Policy in 2017
In 2017, the Chinese tax administration introduced a policy that brought significant changes to the fapiao structure. This policy, effective from July 1, 2017, imposed additional requirements when taxpayers request a fapiao. Under the previous system, taxpayers only needed to provide their company’s Chinese full name. However, the new policy mandates taxpayers to furnish more detailed information.
The 2017 policy also outlines the steps that service providers must take to adapt to these legal changes, avoid legal issues, and ensure compliance. Employers have a responsibility to inform their HR and financial departments about these new regulations and procedures. Additionally, service providers must align their systems with the new VAT policy to ensure full compliance.
China: VAT Policy Changes in 2019
On August 13th, 2019, the State Administration of Taxation (SAT), responsible for tax collection and enforcement of state revenue laws, announced a significant change. Small-scale taxpayers, regardless of their industry, are now empowered to issue their own Special VAT fapiao. Under the previous system, these taxpayers had to rely on the tax bureau to issue these documents on their behalf, resulting in administrative burdens for both businesses and tax authorities. This change is welcomed not only by small-scale taxpayers but also by general taxpayers, as it simplifies the process of obtaining a Special VAT fapiao from business partners.
Understanding Chinese VAT: What Is a Fapiao in 2023?
The Fapiao invoice system remains a cornerstone of China’s tax law. “Fapiao” is a Chinese term denoting an official document that serves as evidence of purchase for goods and services. This receipt is essential for businesses and taxpayers to meet the legal requirements of the Chinese tax system and to track transactions between companies. A company can only issue a valid fapiao if the transaction falls within the operational boundaries of the business.
It’s crucial to note that a fapiao differs from a regular receipt because it is valid only when printed on special paper provided by the Chinese tax authorities. Only the State Administration of Tax (SAT) handles the production, distribution, and administration of fapiao. If a company uses any other type of paper, it is unlikely to be recognized as a legitimate fapiao by Chinese tax authorities, leading to the denial of VAT deductions.
Payroll outsourcing providers play a crucial role in assisting companies with Value Added Tax (VAT) compliance in China. These providers offer a range of services that can greatly simplify the VAT process for businesses operating in the country. Firstly, they ensure accurate and timely calculation of VAT obligations based on the nature of the company’s activities and the applicable tax rates. This eliminates the risk of miscalculations or errors in VAT reporting.
Moreover, payroll outsourcing providers often integrate VAT compliance into their broader suite of services, making it easier for businesses to manage both payroll and tax-related tasks efficiently. They keep abreast of changes in VAT policies and regulations, ensuring that their clients remain up-to-date and fully compliant with the latest requirements. Additionally, outsourcing providers can assist in the preparation and submission of VAT returns and other necessary documentation to the tax authorities, reducing the administrative burden on businesses.
Furthermore, they can facilitate the issuance of VAT fapiao, a critical aspect of compliance in China. By handling these intricate tasks, payroll outsourcing providers like China Payroll enable companies to focus on their core operations while maintaining peace of mind regarding their VAT obligations and adherence to local tax laws.
Overall, their expertise and comprehensive services make them valuable partners for companies seeking to navigate the complexities of VAT compliance in China. Contact us now for more information.
