December 2008Client Alert

China’s Value-Added Tax Reform

In the first week of November 2008, the People's Republic of China ("PRC") State Council announced that the pilot Value-Added Tax ("VAT") reform implemented in certain industries in northeastern China will be extended to cover all industries in all of China beginning January 1, 2009. This new VAT reform is part of a larger economic stimulus package announced by the PRC.

The reform generally transforms China's VAT system from a "production-based" system to a "consumption-based" system. Under the new "consumption-based" system, the input VAT incurred on the purchase of fixed assets will be fully deductible; previously it was not. The VAT reform is expected to help businesses throughout China upgrade their production equipment.

The VAT reform can save businesses a substantial amount of money on investment in new equipment. Therefore, in most cases, companies planning to invest in new equipment or upgrade existing equipment in China should consider:

  • postponing any equipment investment until the beginning of 2009; or 
  • investing in equipment this year, but negotiating with the vendor to postpone the date of invoice (Fapiao) until next year.

Foreign-invested enterprises identified as "encouraged" companies or those entitled to a VAT tax refund for purchasing equipment from Chinese manufacturers may want to make equipment purchases in 2008, however, because incentives relating to these circumstances are being removed by the new VAT reform. It is, therefore, important to examine the specifics of your company's particular circumstances before deciding on the most economically sound strategy for making equipment purchases in China.

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