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Key impacts of the upcoming VAT Reform Taxing method ©2015. For information, contact Deloitte China. It is expected that the VAT Reform will be complete by 2015, so the clock is counting down now. Hospitality companies are recommended to understand the potential impacts of the upcoming VAT Reform on their business and quantify from both financial and commercial perspectives. The credibility of VAT charged by hospitality Currently, the VAT charged on passenger transportation services (e.g. airline, railway) is not deductible at the customers side; After the VAT Reform, whether the VAT charged by hospitality can be deducted by the customers is crucial and may affect the hospitality s ability to charge VAT to the customers in the commercial practice. The complexity of VAT treatment on different revenue streams Different VAT treatments may apply on different revenue streams (e.g. hotel rooms revenue, long-term leasing income, catering service income, SPA service income, sales of goods (e.g. SPA products), conference service charge); Deemed sales possibilities on supply of goods and/or services free of charge; Need to separately account for the revenue generated from different activities and apply the appropriate VAT treatments. Before the Reform After the Reform 5% Business Tax (BT) General taxing method (likely under the current discussion) VAT payable = Output VAT input VAT (likely 6% VAT rate); In theory, VAT is neutral as it can be passed through to end customers. However, it may not be easy to fully pass on all the VAT to customers from a commercial perspective; The purchase cost can be reduced as the input VAT incurred on costs is recoverable. How to get sufficient VAT invoices to support input VAT deduction could be an issue, especially if some of the suppliers are small scale VAT payers. Simplified taxing method (according to Caishui [2011] No. 110) VAT payable = revenue * VAT levying rate (likely 3%); No input VAT credit, so the VAT cost on purchase could be higher after all industries joining the VAT reform pilot Prepared in May 2015 1/ Conclusion of the VAT Reform by 2015: Act now, stay ahead VAT Reform Readiness Series - Hospitality

VAT Reform Readiness Series Hospitality May2015 EN · PDF fileEastern China LiqunGao Partner +86 21 6141 1053 ligao@ Southern China Janet Zhang Partner +86 20 2831 1212 jazhang@

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Page 1: VAT Reform Readiness Series Hospitality May2015 EN · PDF fileEastern China LiqunGao Partner +86 21 6141 1053 ligao@ Southern China Janet Zhang Partner +86 20 2831 1212 jazhang@

Key impacts of the upcoming VAT Reform

Taxing method

©2015. For information, contact Deloitte China.

It is expected that the VAT Reform will be complete by 2015, so the clock is counting down now.

Hospitality companies are recommended to understand the potential impacts of the upcoming VAT Reform on their business and quantify from both financial and commercial perspectives.

The credibility of VAT charged by hospitality• Currently, the VAT charged on passenger transportation services (e.g. airline, railway) is not deductible at the customer’s side; • After the VAT Reform, whether the VAT charged by hospitality can be deducted by the customers is crucial and may affect the hospitality’s ability

to charge VAT to the customers in the commercial practice.

The complexity of VAT treatment on different revenue streams• Different VAT treatments may apply on different revenue streams (e.g. hotel rooms revenue, long-term leasing income, catering service income,

SPA service income, sales of goods (e.g. SPA products), conference service charge);• Deemed sales possibilities on supply of goods and/or services free of charge;• Need to separately account for the revenue generated from different activities and apply the appropriate VAT treatments.

Before the Reform After the Reform

5% Business Tax (“BT”)

General taxing method(likely under the currentdiscussion)

• VAT payable = Output VAT – input VAT (likely 6% VAT rate);• In theory, VAT is neutral as it can be passed through to end customers. However, it may not be

easy to fully pass on all the VAT to customers from a commercial perspective;• The purchase cost can be reduced as the input VAT incurred on costs is recoverable. How to

get sufficient VAT invoices to support input VAT deduction could be an issue, especially if some of the suppliers are small scale VAT payers.

Simplified taxing method(according to Caishui [2011] No. 110)

• VAT payable = revenue * VAT levying rate (likely 3%);• No input VAT credit, so the VAT cost on purchase could be higher after all industries joining the

VAT reform pilot

Prepared in May 2015

1/

Conclusion of the VAT Reform by 2015: Act now, stay aheadVAT Reform Readiness Series - Hospitality

Page 2: VAT Reform Readiness Series Hospitality May2015 EN · PDF fileEastern China LiqunGao Partner +86 21 6141 1053 ligao@ Southern China Janet Zhang Partner +86 20 2831 1212 jazhang@

(3)

(2)

(1)Assessment and preparation• Assess the possible impact on company’s financial and tax situations, and develop different strategies for

different situations.• Formulate strategic and detailed work plans on the preparation for VAT Reform.• Examine systems and design the relevant improvements to satisfy the tax compliance requirement after

VAT Reform.• Have initial communications with suppliers and customers on potential impacts of the Reform.• Organize fundamental training for the relevant personnel (e.g., finance, tax, legal, purchase, sales, etc.).• Examine and revise the tax clauses in the commercial contracts.

Review, improvement & implementation• Review the work under Phase 1, and revise if necessary.• Based on above, implement the work plans.• Communicate with in-charge tax authorities, and conduct VAT registration, invoice purchase, and other

compliance work.

Regularly review & follow-ups• Monitor the implementation results of Phase 1 and 2 and the system operation for a certain period (e.g., 3 months),

and conduct systematic review to identify problems and seek solutions.

Before the rules are released

After the transition period

After the rules are released

VAT Reform Readiness Program

©2015. For information, contact Deloitte China.

• Experience from the past 3 years - Very short timeframe for preparation after the rules are announced.• Our suggestion - Counting down from the likely effective date and prepare an action plan, with milestones, financial

impact analysis on pricing, compliance and systems needs, communications with customers.• A phased systematic approach is recommended to help your company prepare for the VAT Reform and ensure a

smooth transition from a BT payer to a VAT payer:

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), and its network of member firms, and their related entities. DTTL and each member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Please see www.deloitte.com/cn/en/about for a detailed description of DTTL and its member firms.This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the "Deloitte Network" is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

Prepared in May 2015

2/

Conclusion of the VAT Reform by 2015: Act now, stay ahead (Cont’d)

Contacts

Sarah ChinNational Leader, Indirect Tax Services+852 2852 [email protected]

Northern ChinaYi ZhouPartner+86 10 8520 [email protected]

Eastern ChinaLiqun GaoPartner+86 21 6141 [email protected]

Southern ChinaJanet ZhangPartner+86 20 2831 1212 [email protected]