In a time of economic turmoil, the only things that remain constant are death and taxes. Across the world, governments are scrambling for revenues.
Putting aside whether fiscal conservatism, stimulus or something in between is the answer, economically anemic and cash-strapped countries are looking at changing their tax structures and collections. Depending on approach, this can bring challenges or opportunities.
The question is how do you stay abreast and take advantage of these shifting economic shoals and currents.
In Italy, the government is going after revenues. Locals driving an expensive car or eating at a high-priced restaurant can expect to be stopped by the tax police and have their tax history reviewed on the spot (thank you iPad). If your last tax return indicated that you earned less than 50,000 Euros and your Ferrari is registered to a foreign corporation, or your dinner was paid with a foreign credit card, it’s not going to be pretty.
In China, the current emphasis is on the stimulus side. Beijing is committed to its GDP targets and has been revamping different parts of its tax structure. On one hand, the taxman taketh – foreigners are now required to pay the same social security and medical taxes as locals. But the taxman also giveth – China is clarifying VAT (value added tax) for certain types of export goods and services, aimed at stimulating exports. Yes, it can be argued that these changes have been in the works for some time, but in China, timing is everything and understanding that is the beginning.
So why is this important to you? And if so, how do you keep abreast of these types of developments?
Let’s say you assumed a 17-percent VAT would be charged on goods/services sourced in China and it is not. Even if you are willing to look at this as a gift to your supplier, it’s doubtful your competition will. First, you need to see if this applies to your business and then go to your contracts and review them. If you have legal clauses that protect you against tax changes, no problem. If not, you need to figure out how to respond. If you have a JV or WOFE (joint venture or Wholly Owned Foreign Entity) you may be in line for some savings, but not unless you know it’s there and how to get it.
What am I referring to?
On May 25, MOF (Ministry of Finance) and SAT (State Administration of Tax) jointly issued a “Notice Regarding VAT and CT (Consumption Tax) Policies for Export Goods and Services (caishui [2012] No. 39, hereinafter referred to as ‘Notice’).” Subsequently, on June 14, the SAT issued the “Administrative Regulations on VAT and CT for Export Goods and Services (SAT Circular [2012] No. 24, hereinafter referred to as ‘Circular).” The regulations abolished a number of previous regulations and stipulations regarding VAT and CT policies. To make matters more interesting some of the provisions are retroactive to January 1, 2011, and others became effective July 1, 2012.
So how do you keep up with these seemingly endless tax changes as a small or mid-sized U.S. company?
Answer: Monitor the reports put out by the Big Four accounting firms. While some are more technical than others, they always provide a summary, they are free and available online. Best strategy, select two of the firms and scan their China tax and business reports. Looking at two firms is recommended, because inexplicably they do not always cover the same issues. If you see something of interest, look at how the other two firms are dealing with it. If you do not have the time or interest, assign it to someone and then put it as a repeating agenda item on your meeting calendar every three months.
Tax policy changes generally move slowly, but you need to give yourself time to do what is necessary to take advantage of any retroactive changes.
Keep in mind that as China adjusts its economic approach there will be more challenges and opportunities. Those who can navigate them to their advantage have a better chance of staying afloat. As time goes by you will also develop better contract terms and understanding of China’s evolving legal and tax system.
