What Does Tax Reform in China Mean for Small Businesses?

This article was originally posted at Axel Standard, a platform for cloud accountants and SaaS applications.

This year started with China’s State Council chaired by Premier Li Keqiang announcing on January 8th support for the country’s main job creators, micro- and small-sized enterprises (MSEs), in the form tax cuts for both Value Added Tax (VAT) and Corporate Income Tax (CIT). The aim of the reform is to lessen the tax burden of Chinas micro- and small-sized businesses and promote long term developments in innovation, entrepreneurship and job creation. Amongst the announcements were the following changes (Caishui [2019] No.13, effective from Jan 01st, 2019 for three years):

1. VAT exemption threshold for small-scale VAT taxpayers increases from RMB 30,000 to RMB 100,000 of monthly revenue.
2. MSEs pay an effective CIT rate of 5% for taxable income less than RMB 1 million, and 10% for taxable income between RMB 1 – 3 million, much lower than the standard CIT rate of 25%.

*MSEs are defined as those businesses with less than RMB 3 million in annual taxable income (= Revenue – deductible costs), less than 300 employees and total assets worth less than RMB 50 million.

In addition to the policies above, China’s State Council released preliminary policy updates on March 5th that it will be further reducing the VAT rates amongst preferential tax policies aimed at reducing the tax burden and support the long term development of Chinese businesses. Changes announced include;

1. VAT rate for manufacturing sectors reduced from 16% to 13%, effective April 1st, 2019.
2. VAT rate for transportation, construction, real-estate and other industries reduced from 10% to 9%, effective April 1st, 2019.
3. VAT rate for services remain unchanged at 6%. However, more deductions for the bracket will be introduced.
4. Mandatory pension contribution by employers reduced to 16%, effective May 1st, 2019.

As opposed to announcements made on January 8th which focused on China’s micro- and small-sized businesses, the policy updates from the 2019 Government Work Report are highly anticipated by all businesses. However, there are two sides to every coin. Despite providing significant tax relief to businesses in 2018, worth an estimated RMB 1.3 trillion, total tax income still grew by 8.3% (RMB 1.2 trillion) outpacing GDP growth. Much of the recent good news for Chinese MSEs is widely believed to be foreshadowing more stringent enforcement of tax and compliance regulations in the coming years.

With more stringent oversight, it’s also increasingly common that poor-quality accounting practices result in financial penalties due to non-compliance. In light of recent changes in China’s tax regulations, business owners are advised to review their compliance status and correct any issues sooner rather than later. For those businesses who already comply with applicable regulation and pay their taxes, the Chinese State Council has promised support for your business to prosper under the current tax reform agenda. However, those businesses who continue to attempt to cheat the tax authorities, are likely to face prosecution under Chinas information driven tax system.