On 25 July 2012, the State Council announced that it shall expedite to extend the VAT transformation pilot program from Shanghai to other 10 regions, including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen, during the period of 1 August 2012 to the end of 2012. Beijing is now on the final stage of the preparation of the VAT transformation pilot program and it is expected that the pilot rules will be published very soon. Therefore, we suggest that the affected enterprises shall have them to be well prepared for the upcoming VAT transformation by performing the following several tips, with a view to comply with the pilot rules and optimize their tax related interests.
- 1. Schedule a work plan and set up a special tax team to deal with the VAT pilot matter
The affected enterprises may consider working out a plan, detailing the specific work to be completed in the corresponding period and the deadline for every specific work. The work plan can be divided into the following phases: the preparation phase before the official implementing of the VAT pilot rules, the phase between the official start date of the VAT pilot and the first filing date of the VAT return; the subsequent three to six months. For the large-scale enterprises or the enterprises with complicated transaction model, it may be appropriate to set up a special VAT team to deal with the VAT transformation pilot matters.
2、Provide internal training on the VAT pilot rules for the relevant staff
Given that there may be very little time left for the affected taxpayers in Beijing to study and digest the pilot rules, it will be a great challenge for the financial / tax department of the most affected enterprises in Beijing. Meanwhile, the VAT transformation pilot program shall impact all aspects of the enterprises such as procurement, marketing, sales, IT, legal, financial and tax and so on. Therefore, we suggest that the enterprises shall ensure all related employee to have a training course on the VAT transformation pilot rules
The internal training will enable the employee to understand how the VAT pilot rules will impact the enterprise’s business. By doing this, the enterprises may better manage their own VAT transformation pilot and reduce the tax risk due to the unknown or misunderstanding for the VAT pilot rules.
3、Coordination and Communication with the upstream and downstream enterprises (suppliers and customers)
In the period of the pilot, it is very necessary for the affected enterprises to make timely and closely communication with the major material suppliers and customers.
For example, it may smooth the business relationship and avoid any potential misunderstanding and disputes, by communicating with clients to let the clients understand how the VAT transformation pilot program impact the service price and the special VAT invoice shall be available for the clients to claim the deduction of the input VAT. As such, the enterprises shall understand the major clients’ information so as to confirm if the clients need the special VAT invoice.
The practice of the VAT transformation pilot program in Shanghai showed that, a dispute may arise if the enterprises did not make effective communication with clients in advance on their changes in response to the VAT transformation pilot program.
4、Pay attention to the issues in the transitional period and the transitional rules
It has been a big challenge for the tax authority to make a seamless transition from the old tax law system to the new tax law system. The enterprises shall pay closely attention to the issues in the transitional period and the relevant transitional rules.
For example, how to judge the trigger point for transitioning from BT to VAT, i.e., whether it should be based on the time when the contract is signed, when the services are performed, when the services are invoiced, or when the service fee is paid.
In addition, if there are any service price adjustments on or after the effective date of the VAT pilot rules, the enterprises shall take the potential VAT refund into account. Given that the clients may still need the business tax invoice after the changeover date but in respect to the service provided prior to that date, the affected enterprises may still need to retain the business tax invoices (fapiao) equipment so that business tax invoices (fapiaos) may be issued.
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