china consumption tax reform update: comsumption - ey · ey observation: opportunities and...
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Following the final stage of Value-added Tax (VAT) pilot reformstarted from 1 May 2016, another important tax reform – theConsumption Tax (CT) reform has been introduced and steadilyprogressed in China. The CT reform is of great political andeconomic significance under a profound social background: 1) TheCT reform is bringing new tax revenue resources for the localgovernment finance; 2) The CT reform is improving the monitoringmechanism within the tax collection system and enhance of taxneutrality; 3) The CT reform is adjusting the relevant taxablescope so as to keep up with the social and economic developmentand play a better role of mitigating certain consumptions bytaxation.
In light of the above, three circulars were issued on 30 November2016: 1) <Circular of the Ministry of Finance (MOF) and the StateAdministration of Taxation (SAT) on Relevant Matters concerningthe Additional Levy of Consumption Tax on Luxury Cars> (Cai Shui[2016] No.129); 2) <Circular of the MOF and SAT on Adjusting theImport Consumption Tax on Cars> (Cai Guan Shui [2016] No.63);3) <Public Notice (PN) of the SAT on Relevant Matters concerningthe Levy and Administration of Consumption Tax on Luxury Cars>(SAT PN [2016] No. 74). By issuing the three circulars, CT onluxury cars was formally introduced: an additional taxation pointat retail stage is imposed on top of the existing taxation point forluxury cars (retail selling price at and above RMB 1.3 million,exclusive of VAT).
China Consumption TaxReform Update:Consumption Tax onLuxury Cars FormallyIntroduced
Key features Change of key features Notes
Taxable item Add “luxury cars” as a newtaxable item
The scope of “luxury cars” refersto passenger vehicles andmedium-sized/light commercialbuses with retail selling price at orabove RMB 1.3 million (exclusiveof VAT).
Taxation point The additional taxation pointat retail stage for luxury carsis imposed on top of theexisting taxation point atproduction/ importation.
Additional taxation point is atretail stage for luxury cars.
Tax rate 10% Adopt the ad valorem method andthe tax base is the retail sellingprice exclusive of VAT.
Special rules For luxury cars sold bydomestic manufacturersdirectly to consumers orimported for self-use, theapplicable CT rates would bethe sum of the rate atproduction/ importationstage and the rate at retailstage.
Luxury cars imported for self-userefers to luxury cars imported bystaffs at overseas embassies,staffs at overseas entities’ Chinarepresentative organizations, non-residential permanent personnelor by agreements betweengovernments and the cars areimported for the purpose of self-use.
Transitionalrules
Where sales contracts havebeen entered into before 1December 2016 and the carshave not yet been delivered,taxpayers would need toregister with tax bureaus forthe contracts within 5working days starting from 1December 2016.
For sales contracts entered intobefore 1 December 2016 withoutdelivery, the cars sold are notsubject to the “luxury tax” if theregistration is completed withinthe prescribed period. Otherwise,the cars sold would be subject tothe “luxury tax” at 10%.
Key FeaturesBackground
EY Observation: Opportunities and challenges forthe automotive industryThe release of the three circulars formally introduced the additionof taxation point for luxury cars (luxury cars become the secondCTable product with multiple taxation point after cigarette) andwould bring the following influence on the automotive industry:
► Retailers within the industry should set up internal CTmanagement process. CT is only imposed atproduction/importation stage for automobile productspreviously and is relatively unfamiliar for retailers. After theCT reform, retailers selling “luxury cars” should set up internalCT accounting method and other controls to fulfill therequirements from CT management and CT complianceperspectives.
► Since some luxury cars are customer-tailored, it is very likelythat taxpayers (refer to entities/individuals selling carsdirectly to customers) would hold sales contracts signedbefore 1 December 2016 without the delivery of cars. Thosecontracts would need to be registered with tax bureaus within5 working days starting from 1 December 2016 (i.e., theregistration should be completed before 7 December). If theregistration is not completed within the prescribed period, thecars sold would be subject to the “luxury tax” at 10%, whichmay cause tax costs or commercial disputes.
► The threshold for the additional tax point on luxury car is setat RMB 1.3 million of the retail selling price (exclusive of VAT).There could be tax planning room for products with a sellingprice near the threshold and the retailers and manufacturersmay benefit in sales revenue and market share by designingthe pricing strategy properly. This may trigger an adjustmenton pricing strategy and standard within the whole industry.
► It is commonly seen that the retailers and manufacturers workvery closely, so from the supply chain perspective, “luxury tax”would have profound influence on the total luxury carsbusiness. Timely adjustments would be required on the pricingsystem and profit allocation, as well as the internal operatingindexes for the whole supply chain.
EY InsightsThe CT reform has been steadily progressed from the back stage instudy and research to the front stage in release and implementationof policies. Any changes regarding the taxable item, tax rate, taxationpoint, collection method and in-charge authorities may have profoundinfluence on the business model, pricing strategy and profit level forthe manufacturers, importers and selling companies of the CTableproducts. Also, since CT is a turnover tax, those influence would be“passed” onto the final customers eventually.
Considering all the three circulars are effective from 1 December2016, EY would suggest luxury car companies to take the followingactions as soon as possible in order to have a smooth transition:
► Review products category and identify CTable products andtaxation point(s);
► Retailers for luxury cars need to take actions regarding the CTcompliance requirements at retail stage, including registration asa CT payer, data preparation for CT returns and adjustment onaccounting method;
► Provide trainings to the management team, finance and taxdepartment and other relevant personnel;
► Pay attention to compliance requirements from any other relatedtypes of taxes (e.g., the minimum tax base for Vehicle PurchaseTax set by the SAT may have influence on the pricing strategy aswell);
► Retailers for other CTable products (not being the CT payer atcurrent stage) are suggested to conduct impact study andpreparation based on the policy tendency of CT reform.
CT reform is moving forward steadily andprogressively► Possible acceleration of CT reform process
Statistically, the CT revenue collection on tobaccos, refined oils,alcoholic products and cars over recent years has amounted toapproximately 95% of the total CT revenue collection. Since thelast round of release of CT circular on cosmetic goods (pleaserefer to Caishui [2016] No. 103 issued on 30 September 2016),it has been only two months that the CT reform on the automotiveindustry has been introduced this time. This could be a signal thatthe CT reform progress is being accelerated. It can be anticipatedthat the CT reform on refined oils and alcoholic products would beput on the agenda soon.
► Related party who has transactions with existing CT payersshould pay attention to the CT reformThe addition of taxation point at retail stage for luxury cars couldindicate that there is a potential trend that the government iscontemplating to shift the CT taxation point to the latter phase ofthe supply chain. In this regard, other than the automotive carsales companies, wholesalers and retailers engage in otherCTable items should also be aware of this potential change of CTreform.
Since the nationwide implementation of VAT pilot reform, there hasbeen the heated debate on a) whether CT revenue should beattributed from existing central government to local government andb) whether CT should be administered by local tax bureaus. If thesuggestions have been adopted and applied by the government, therewould be a variety of changes on CT regime, including the changes onin charge tax authority, the management mode, the means ofmonitoring as well as the means of reporting and receiving tax data.Companies who could be affected should keep following up on thepolicy update.
EY has assisted a number of companies in CT reform preparationincluding impact study and implication analysis. EY will closely followup with the latest CT reform policy and will provide our update andinterpretation timely. Your attention is highly appreciated.
China Consumption Tax Reform Update: Consumption Tax on Luxury Cars Formally Introduced
Kenneth LeungGreater China Managing Partner+86 10 5815 [email protected]
Indirect Tax, Beijing
Tian ShuErnst & Young (China) AdvisoryLimited Beijing Branch OfficeIndirect Tax Partner+86 10 5815 [email protected]
Susan LiuErnst & Young (China) AdvisoryLimited Beijing Branch OfficeIndirect Tax Partner+86 10 5815 [email protected]
Hongli WangErnst & Young (China) AdvisoryLimited Beijing Branch OfficeIndirect Tax Director+86 10 5815 [email protected]
Andrea YueErnst & Young (China) AdvisoryLimited Beijing Branch OfficeIndirect Tax Director+86 10 5815 [email protected]
Contact us
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Bryan TangErnst & Young (China) Advisory LimitedIndirect Tax Partner+86 21 2228 [email protected]
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Lynette DongErnst & Young (China) Advisory LimitedIndirect Tax Director+86 21 2228 [email protected]
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Steven LinErnst & Young (China) Advisory LimitedGuangzhou OfficeIndirect Tax Director+86 20 2881 [email protected]
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Ivy ChenErnst & Young (China) AdvisoryLimited Shenzhen OfficeIndirect Tax Director+86 755 2502 [email protected]
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Marc BunchErnst & Young Tax Services LimitedIndirect Tax Partner+852 2629 [email protected]
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