In March2016, during the National People’s Congress, Li Keqiang, China’s Premier, announced that Value Added Tax (VAT) reforms will be fully implemented starting from May 1, 2016. This decision aims at aligning China’s indirect tax policies with international practices, as well as to support the goal of transforming the country from a manufacturing based economy into a service industry oriented economy.

In China, the tax system is rather complex as the government has not implemented a simple VAT rate approach for all sectors of the economy. What’s happening in 2016 is major reform with the transition from BT (Business Tax) to VAT forconstruction, real estate, financial and consumer services industries. If you are living and working in China, this reform may have impact on your bills.

Tax rate change, from BT to VAT

DLA Piper article’s is a good source of information to understand the BEFORE / AFTER May 1st 2016 for the construction, real estate, financial and consumer services industries.

Industry	Scope	Current BT rate	Applicable VAT rate
Construction services	Construction, installation, repairs, decoration and other construction projects	3%	11%
Real estate	Sales of buildings and other structures built on land Assignment of land-use rights and natural resources use rights real property leasing	5%	11%
Financial & Insurance		5%	6%
Consumer services	Culture and sports, education and medical care, tourism and entertainment, catering and accommodations, daily residential services, and other lifestyle services	5% (entertainment 5-20%)	6%

Practical implications for tenants

Practical implication: if you are renting a property (Office space, apartment, villa, courtyard…) in China,the applicableVAT rate is 11%. There is still an ongoing discussion to distinguish property leasing fromshort-term service apartment leasing.

According to the new VAT regulation, landlords wouldbesubjected to an 11% VAT on their rental revenues instead of the previous 5% business tax. HOWEVER, when calling the tax bureau we could not get the accurate information about the future tax amount (from 1.5% to 11%) although many sources tend to say it will be 11% for real property leasing. So we can only know when it is implemented from May 1 2016.

We can easily anticipate that in order to secure their revenue, landlords will try to pass this cost on to tenants by increasing rents. To be discussed with your preferred SCOUT Real Estate Consultant!

Sources:

http://www.ccilc.pt/sites/default/files/china_vat_system_en.pdf

http://www.gide.com/sites/default/files/gide_china_clientalert_tax_lastrunprcvatreform_en_apr2016.pdf

http://www.ey.com/Publication/vwLUAssets/EY-china-vat-reform-are-you-ready-for-the-last-run/$FILE/EY-china-vat-reform-are-you-ready-for-the-last-run.pdf

http://www.colliers.com/en-gb/china/about/media/2016-04-06-china-expand-vat-real-estate

From April 1st: Reduced Tax declaration periods for Small-Scale & Low Profit Taxpayers

http://www.bloomberg.com/news/articles/2016-04-21/china-s-biggest-tax-reform-in-two-decades-aims-to-boost-growth

http://www.china-briefing.com/news/2016/04/08/china-life-services-industry-undergoes-vat-reform.html