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China's Transition to a VAT System
Over the past 12 months, China has begun to transition from a business tax (“BT”) system to a Value Added Tax (“VAT”) system using Business to Value Added (“B2V”) pilot programs. These B2V pilot programs have been introduced in Beijing and Shanghai for certain industries, including legal consulting services. If the VAT applies, then the 5% BT does not apply. Seven other provinces and municipalities are scheduled to join the B2V pilot program by the end of 2012.
While the Shanghai pilot program is not yet mandatory, it is expected that participation in the other B2V pilot programs will be mandatory for targeted industries. The Beijing VAT pilot program became effective on Sept. 1, 2012. Legal consulting revenue generated by all Beijing Registered Offices (“BRO”) of foreign law firms should now be subject to VAT instead of BT.
The VAT rate may differ depending upon the VAT position of a China-registered taxpayer (e.g., China RO). If the China-registered taxpayer is a small-scale VAT payer, a VAT rate of 3% will apply and no input credit is allowed. A small-scale VAT payer has annual services revenue of less than 5MM RMB subject to VAT. If the China-registered taxpayer is a general VAT payer (generally, a firm with annual services revenue greater than 5MM RMB), a VAT rate of 6% is applicable to the legal services revenue the taxpayer generates, and input credits are allowed. In the case of a foreign (non-China) law firm ' which is a different taxpayer from its BRO ' the VAT rate for legal consulting services is 6%.
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