Managing China VAT issues effectively in turbulent times

The coronavirus outbreak is expected to cause disruption to many businesses operating in China; to present challenges in businesses’ managing their tax obligations on a timely basis; their cashflow commitments; and in dealing with suppliers and customers.

VAT liabilities have a significant impact on cashflow, primarily because VAT often needs to be accounted for on sales before the underlying revenue from those sales is received; and from a purchase perspective there is often a lead time between the payment of expenses and obtaining the benefit of input VAT credits. These timing differences can be exacerbated further in China where businesses have a VAT credit balance whichis not refundable.

It is also the case that in China the obligation to account for VAT on sales may itself not be recovered from the purchaser in full, even though economically VAT is not intended to be a tax on business itself. This is a function of many factors, including the use of differential VAT rates; businesses unable to claim VAT credits on their costs through the use of simplified VAT methods; situations where VAT credit balances are not refundable; and the inability to claim input VAT credits (in full) for activities subject to exemption and even zero rated sales of certain goods.

All of these factors mean that the efficient management of VAT cashflow obligations, and optimising VAT liabilities, will be under the spotlight during this period. Furthermore, it is anticipated that the government will issue further measures to mitigate the VAT impact on businesses, especially those in key affected sectors. This material is current as of 7 February 2020.