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

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.