Reform of tax system with B2V will result in winners and losers

The nation's top leadership aims to establish a modern fiscal system by 2020, and tax reform is a key part of that drive. But some companies could face higher costs as a result, experts said.

Speaking to the Xinhua News Agency, Finance Minster Lou Jiwei said reform would focus on six categories of tax: value-added, consumption, resource, environmental, property and personal income.

Experts said the area with the largest impact on companies, especially foreign companies, is the move to replace the business tax with VAT, which some analysts call B2V reform.

B2V reform began in 2012 with the transport and modern service sectors in Shanghai. The goal was to cut companies' total tax burden and encourage cooperation by allowing companies to deduct VAT via invoices from their suppliers. The reform later went nationwide and expanded to more sectors. The latest step was on June 1, when the telecommunications sector was added.

Tax authorities said in March that nationwide, B2V reform had helped lower companies' tax burden by about 140 billion yuan ($22.4 billion) as of the end of 2013.

But not every company is necessarily coming out ahead. On the day the reform was extended to the telecoms sector, the three major operators issued statements saying that the change would actually mean a significant decrease in their profit.

China Telecom Corp Ltd, for example, said its profit would drop by 30 percent.

Li Jun, a tax partner with PricewaterhouseCoopers LLP in China, said the telecom operators made large equipment purchases before B2V reform began. That equipment does not qualify for tax deductions, and in some cases, the telecoms companies can not get VAT invoices from their suppliers.

Those factors could push up the operators' costs, because the tax rate has risen from 3 percent (business tax) to 11 percent (VAT). But other companies purchasing services from the telecom operators will benefit from tax deductions, and that will lower their costs, he said.

As for B2V reform, a more influential move will be the expansion into the financial sector, Li said. The financial industry, construction industry, real estate industry and consumer service industry are the sectors left before B2V reform is complete.

There will be difficulties in pursuing B2V reform in the financial sector, he said. Right now, the financial sector pays business tax at a rate of 5 percent. The VAT rate will be 11 percent. Also, the massive number of transactions in the financial sector means a huge volume of invoices, which will pose a challenge to financial institutions' compliance divisions and possibly push up operating costs.

Li said a draft plan for B2V reform in the financial sector may come out at the end of this year, and it will be implemented in the second half of 2015.

Another tax change that will lead to higher operating costs for companies involves the resource tax. Jia Kang, head of the Research Institute for Fiscal Science at the Ministry of Finance, said the reform is on the agenda this year, despite resistance from various parties.

Resource prices are expected to rise after the tax base is shifted from output to sales value. The resource tax on coal, for example, will be 10 times the current level, Jia wrote in a recent article.

A law covering environmental tax reform has been submitted to the National People's Congress, but there is no date for its official launch, Su Ming, deputy head of the Finance Ministry's research institute, said in a recent interview with Aastocks.com.

Last but not least, Lou said, local governments offer too many tax breaks to attract investment, and that practice is not in line with establishing a fair market and modern fiscal system.

In the future, local governments will need State Council (cabinet) approval for such tax breaks, he added.