Mossack Fonseca: China to Stimulate Economy with Supply-side Economics

China will change its business tax (BT) to a value added tax (VAT) this year, which will lead to a reduction in taxation, as per a statement by China’s State Council after a meeting on Jan 22, 2016. The Chinese Government is embarking upon one of the most ambitious tax reform programs in recent history by replacing their BT with a VAT.

For many years, China has operated a dual system of indirect taxes, with a VAT applicable to the sale and importation of goods, typically at the rate of 17 percent. By contrast, most services have been subject to a BT at rates of either 3 percent or 5 percent. These reforms are taking place because a BT is an inefficient turnover tax, which taxes business–that is, it effectively taxes each stage of a supply chain, irrespective of the profit or ‘value added’ by each business in that supply chain. By contrast, VAT is a tax collected by business, but effectively only borne by the end consumer.

Premier Li Keqiang stressed the following points during the meeting:

• The change from a BT to a VAT is a crucially important step for deepening their fiscal and tax reforms.
• The government will further promote the change and better help reduce corporation taxation.
• The changes will exert a positive influence on developing the country’s service industry―and at the same time upgrading industrial and hi-tech enterprises.
• Efforts should be made to encourage the role of the market.

Premier Li also said that while there will be a certain amount of pressure on financial revenues, government at all levels should combine their efforts in order to meet future challenges.