More Detailed Rules on VAT to be Released to Better Prepare for Tax Reforms

More Detailed Rules on VAT to be Released to Better Prepare for Tax ReformsFinancial services leader are expected to give out a more detailed rules on the value added tax reform that is scheduled to come out so that they can better prepare for the reform that is aimed at lightening the tax burden. PwC China financial services tax leader Matthew Wong said that they have talked to several bankers and they can’t see hoe the reform can help banks in reducing the tax burden since rates are higher and the amount of input VAT that is effectively credited is difficult to estimate.

Unless the government can further clarify the uncertainty on how the VAT rules is being interpreted, its premature for them to say that he VAT reform will be able them to save tax for the banking industry. Financial service sector in China has been paying around 5 percent business tax for years, and in May they will start paying the 6 percent VAT. Although there are a lot more items that still requires further clarification from tax authorities, new VAT rules will have exemptions in the interests in connection with interbanking funding activities. Although the scope of the exemptions is smaller than the old business tax rules, interbank funding is considered a normal activity that allows banks to gather funds to re-lend to customers. By changing the scope of non-taxable items will lead to higher costs in the re-lending business.

VAT reforms changes the overall operating banking environment as it changes the accounting and reporting format of banks and other financial institutions. The reform also changes the pricing model and changes bank relations with clients as well. Generally, big banks will less be likely to be affected by the reform since they can shift additional tax burden to clients. Smaller banks don’t have this discretion in raising prices so they can transfer the tax burden to its clients. Banks need to inform their clients and observe how the clients react to the situation as they may revise their agreements in making new contracts and it needs to be tested in the market on whether the client is willing to accept the new agreement terms.

Active communication is needed with tax authorities, clients and IT vendors for any VAT related matters. In reviewing terms and conditions is needed to endure the implication of VAT is fair and transparent.

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