Tax reform helps small business, clean energy

Taxes remained high on the agenda of Chinese policymakers last year as the government attempted to strike a new balance by supporting small businesses, high-technology sectors, and services industries.

Domestically, various tax cuts have been announced, value-added tax reform further expanded, and regional tax policies are to be unified.

Internationally, China, joining the United States and European Union efforts to close loopholes that allow multinational corporations to evade taxes, reclaimed millions of yuan from a US multinational company.

To kick off the new year, Shanghai Daily sat down with Walter Tong, managing partner of Ernst & Young tax services, in charge of China's business, to discuss tax reform and its impact.

Tong has more than 20 years of experience in tax services, specializing in multinational and domestic companies involved in cross-border trading.

Q: What are the main targets of China's domestic tax policies?

A: In the past year, China has done quite well in reforming the tax system, with emphasis on supporting innovation, relieving the burden on small businesses, promoting clean energy, developing the nation's western regions and improving services for taxpayers.

For example, industries such as manufacturing of computers have benefited from rules allowing more tax deductions for corporate income tax purpose through accelerating depreciation of fixed assets. A list of industries eligible for lower corporate income tax rates in the western region was finally announced. Also last year, tax rates were lowered for very small and micro-sized businesses, while the consumption tax on oil was raised to encourage companies and individuals to use clean energy.

Most notably in terms of tax management, the corporate income tax return forms have been expanded from 16 to 41 pages to enhance tax risk management. Companies are required to submit more details on their businesses and, especially, on their qualifications for tax benefits. For example, a high-new technology company that is paying preferential corporate income tax needs to prove it is still part of the original industry to continue to qualify for benefits. The additional information allows tax authorities better allocation resources.

Q: What major tax reforms should China undertake this year?

A: Tax reforms that started in 2014 will continue. What's likely to be the major task for tax authorities is replacing the business tax with the value-added tax for financial, real estate and hotel industries. Last year, industries such as railway transportation, telecommunications and postal services have been included in the VAT regime. This year, which marks the end of the 12th Five-Year Plan period, authorities are likely to roll out VAT for all the industries on its list.

At present, tax authorities are still seeking public input from companies and professional service agencies like us, and they are working out details on whether to introduce simplified taxation for some sectors. Many large companies, including real estate developers, banks and insurers, are already getting gearing up for the changes by altering their IT systems and internal operations.

Q: The central government in November released a document requiring local governments to stop implementing preferential tax policies to attract investment. Do you think that will work?

A: Many companies are concerned about the document, but there are still many uncertainties regarding its practical details. For example, it hasn't been decided whether all companies will be deprived of the benefits or just newcomers. The State Council has set a direction, but it depends on how local governments will implement the rules. I personally think preferential policies related to land acquisition may be the first to be scrapped, but those aiming to encourage innovation and high technology industries might remain.

Q: Consumers have complained about the government raising the consumption tax on gasoline, especially as oil prices continue to tumble. What do you think is the impact of tax reform on consumers?

A: Previously the consumption tax was meant to be applied to luxury products. But now, those deemed to be luxury products, such as some personal care items, aren't really luxuries anymore. So the consumption tax is going "greener" — shifting toward high-emission and inefficient industries.

On the other hand, the retail price for gasoline and diesel has heavy reliance on lots of aspects other than tax, including general international supply/needs, the OPEC agreements and the macro political/economic environment. Further, currently the consumption tax is not taxed at retailing level and the indirect impact brought by the tax rate adjustment on retailing price is not significant.

Rather, I believe the bigger impact on consumers comes not from the consumption tax but from the VAT. For example, if you stay on a hotel, you pay a 5 percent business tax, but in the future, hotels may adjust the price according to the VAT rate they have to pay and also to their business conditions. The same will hold true for real estate. It depends on the final rules and how companies react to VAT reform. In general, I think the Chinese government will always encourage consumption, so any changes won't greatly affect the vast number of ordinary consumers. The trend is to a general lower tax burden for consumers.

Q: Chinese tax authorities have accused some multinationals of tax evasion even though the methods they use are all legal. Do you think China will tighten rules on foreign companies?

A: China has been actively involved in the anti-tax evasion project known as BEPS (base erosion and profit shifting), which mainly impacts multinational companies. The project was initiated by the Organization for Economic Cooperation and Development (OECD), and China, as a G-20 member, is participating.

The OECD has already publicized seven papers on BEPS initiatives including strengthening taxpayers information disclosure scheme. Most importantly, it emphasized that tax must be in align with the value creation and economic activities. Accordingly, besides voicing out developing countries positions in OECD, China has submitted its own tax technical opinions to the United Nations including how to assess tax treatments on cross-border service fee payments.

In November, the State Administration of Taxation held a meeting with more than 200 companies to press China's efforts in international anti-tax avoidance and voiced China's dissent on abusive tax treaties and gaps among different jurisdictions tax systems.

Although the OECD deliverables have not yet turned into binding international agreements, domestically Chinese authorities have sent a clear signal of tightening investigations of tax evasion. Companies will be asked to file more information concerning their operations, and Chinese authorities will be able to cross-check a company's claims with foreign authorities through enhanced international information exchange mechanism.

Meanwhile, Chinese multinationals will also be subject to similar scrutiny when operating in other markets. On the other hand, tax disputes could be negotiated and solved more efficiently as proposed by BEPS action plans.

In general, the BEPS project will help improve the global tax environment by unifying standards and increasing transparency of corporate operations.