PwC Tax Insights China Finance Tax News Flash

BT to VAT Reform in Securities Industry October 2015 Issue 1 In brief The national business tax (BT) to value added tax (VAT) transformational pilot programme (B2V Pilot Programme) has been practiced for over 3 years since 1 January 2012. The State Council’s initial schedule striving for completing the overall B2V reform in the 12th Five-Year Plan period has changed. So far, four sectors including finance and insurance, construction, real estate and consumer services are still not subject to VAT. Finance and insurance sector is expected to be the last sector covered by the B2V reform with the implementation probably in 2016. Generally, analysis on the B2V reform in finance and insurance sector are m ore focused on banking and insurance industries. However, the securities and assets m anagement in the financial industry also encounter with common issues of financial industry, for example how to transfer output VAT; how to obtain effective input VAT credit, and whether business tax reduction or exemption policies for certain incom e under existing business tax system continue to be effective. Relevant enterprises should assess and attach great attention to potential issues faced in the B2V reform, and evaluate the reform’s impact on corporate finance and chain effects on business departments, system support and supplier-customer relationship based on their business positions, so as to m ake full preparation to realise a sm ooth transition.

In detail Possible problems of B2V reform in securities industry Securities industry is still at the initial stage of transformation. It contains various business categories, generally including traditional security service 1, capital intermediary 2 and investment 3. The tax rate for incom e from fees and com m issions, management and consultancy of these businesses probably will be 6 % after the B2 V reform. Below are the potential issues of the B2V reform in securities industry: How to transfer extra VAT Although income from brokerage business accounts for ov er half of the total income of the whole securities industry, m ore than 9 0% of brokerage customers are individuals. Under existing business tax

sy stem, charging standards are agreed in contracts between security com panies and customers, thus business tax incurred should be undertaken by enterprises without extra charging from customers. Meanwhile, individual customers are not entitled to input VAT credit as institutional customers. Therefore, transferring VAT to individual customers might be difficult. In addition, for m anagement fees charged for assets m anagement plans by security enterprises, security enterprises are not entitled to invoice such assets m anagement plans for input VAT credit, as the bodies of these plans are neither individuals nor enterprises, and there are no specific taxation regulations under existing tax sy stem. However, does it m ean that there is no way for securities industry to transfer the VAT on incom e from brokerage business? If taking an in-depth analysis into security

enterprises’ products, it can be found out that som e one-onone assets m anagement products and special account products are likely to reach the target of enabling institutional investors get the input VAT credit through proper change of charging method and the am endments of contracts, which m eans it would be possible to transfer the output VAT of these products out. Certainly, whether this approach is feasible would also subject to the confirmation with the in-charge tax bureaus of both contracting parties. How to obtain enough input VAT credit There is no input VAT credit for expenses such as salaries and bonuses directly paid to em ployees in security enterprises, neither can procurement costs whose suppliers are individuals, the individual business owners and sm all-scale taxpayers enjoy input VAT credit. Meanwhile, if fees charged to customers by

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China Finance Tax News Flash security enterprises on behalf of other related trading institutions need to be included into taxable income, uncertainties remain on whether security enterprises could obtain special VAT invoices from the related trading institutions to credit against the output VAT. Theoretically, there probably will be input VAT credit for general m arketing and office expenses after the B2 V reform implemented in other industries. However, whether suppliers are general taxpayers and qualified to issue special VAT invoices also needs to be considered. For suppliers who are not general taxpayers such as individuals, smallscale taxpayers, individual business owners, they could not issue special VAT invoices or have difficulties in issuing VAT invoices. Whether system improvement is necessary VAT is charged in addition to the price and the input VAT could be used to credit the output VAT, while business tax is included within the price and does not have deduction m echanism, which differs significantly from the VAT system. In this regards, there are 3 top priorities for security enterprises to achieve after the B2V transformation, including separation of price and tax, accurate tax payment and sm ooth invoicing upon request. Securities industry shares a common feature of financial industry, i.e., business operation highly depends on sy stems such as business system, information management system and analysis system. To satisfy the above requirements of the B2 V transformation, securities enterprises m ight have to consider improving the existing business system. Sy stem improvement is time consuming and the cost is relatively high. In this regard, enterprises should take into account the necessities of sy stem improvement based on their own circumstances. For instance, for those securities enterprises whose m ain customers are individuals without invoicing requirement, the enterprise may consider adopt alternative plans including using plug-in system or m anual ways to m eet the need for VAT declaration based on their trade v olume and internal management, etc. As for enterprises with high demand for internal control that expect to realise effective management of VAT 2

through system automation, system im provement is preferred. During system improvement, enterprises would encounter various challenges and problems, including: 1) how to com plete multiple system im provement work within a short time; 2 ) the major core systems of securities enterprises are developed by Hundsun Technology Inc., Shenzhen Kingdom Technology Co. Ltd., and Shine Technology via outsourcing with obv ious monopolies, as a result, changing the core systems require m uch on the support of outsourcing serv ice providers; 3) the invoicing and m aintenance of VAT invoice are subject to stringent policy supervision, so VAT related procedures should be fam iliar with before the system im provement; 4) new security loopholes m ight emerge in systems after system improvement. Unfamiliar VAT invoice management and tax declaration process The issue of output VAT invoice and the v erification of input VAT invoice have to be operated through golden tax system, thus the content of tax returns and related declaration procedures are more complicated com pared with business tax system. Without enough knowledge about VAT sy stem, related declaration procedures and invoicing regulations, existing financial or tax staff m ight not be able to satisfy the need for the declaration, payment and invoicing of VAT with accuracy and compliance after the B2V reform. Quite different from the m anagement of business tax invoice, management on special VAT invoice under VAT regime is v ery important as it is rigorously m anaged and controlled by tax bureau and plenty of econom ic illegal cases are related to misconducts in the management of special VAT invoice. Inappropriate use, custody and invoicing of special VAT invoice resulting in serious consequences m ight be subject to criminal punishment. Therefore, security enterprises have to improve the ov erall management of special VAT invoice.

and be aware of potential issues during the reform, in order to assess the im pact on corporate finance and the chain effects on business departments, system support and supplier-customer relationship based on their real circumstances and business features. Enterprises can start from the tasks below to realise a sm ooth transition: ‐

From business perspective, enterprises should start to comb through upstream and downstream businesses and procedures and review related docum ents and contracts;

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From income perspective, enterprises should consider how to effectively transfer output VAT taking into account com prehensive factors such as customer types (general/smallscale), negotiation capacity, product design, and market com petitiveness;

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From cost perspective, security enterprises should think out of box when dealing with problems of output VAT, i.e., they should av oid the transfer of VAT from serv ice providers/suppliers so as to cut cost and credit input VAT invoice. One thing that has to be noticed, suppliers that are general VAT payers are not only the best choice. The selection of suppliers should take both the cost and input VAT credit into consideration as a whole.

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For inv oice management, enterprises should build invoice m anagement scheme at all levels, clarify the collaboration m echanism between staff incharge of invoice m anagement and the staff under tax, business and finance departments. In addition, they should establish invoice m anagement process and operation guidance and offer tax training for related staff.

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For sy stem improvement, enterprises should know about their own business and m anagement requirement to propose adv ices on sy stem im provement such as the solution to the linkage of corporate system and golden tax system in order to find a suitable system solution.

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For project management, enterprises should build a steering committee and project team for the B2V reform and hire

How to deal with the changes The transitional period might be very short for enterprises after the launch of the B2 V reform in securities industry. Relevant enterprises must closely follow the related development,

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China Finance Tax News Flash intermediary agencies to provide technical support. Furthermore, they should set clear goal, schedule and work plan for the project, follow up im plementation of the project and m ake regular assessment during the process. We suggest the aforesaid preparations be done as soon as possible, for the purpose of sav ing as most time after the im plementation of the policies of the B2 V reform and the system testing

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as well, thereby avoiding possible m istakes in accounting, tax declaration and compliance upon the im plementation date of the policies.

2.

Including fund-providing businesses (m argin trading, agreed repurchase trading, stock-pledged repurchase trading, and purchase for resale bus inesses) and fund-collecting bus inesses (refinancing, bondpledged repurchase, and sale for repurchase businesses).

3.

Including proprietary business and direct equity investment business.

Endnote 1.

Including securities brokerage, future brokerage, securities underwriting, as sets management, and financial consultancy (i.e., investment consulting).

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China Finance Tax News Flash

Let’s talk For a deeper discussion of how this issue might affect your business, please contact the members of PwC’s China Securities Industry Service: Ja n e Xue ，Audit Partner (Accounting) +8 6 (21) 2323 3277 ja n [email protected]

Ma t thew W ong *** ，T ax Partner (Tax Con sulting) +8 6 (21) 2323 3052 m [email protected]

St ella Fu ，Tax Director (Tax Con sulting) +8 6 (21) 2323 2907 st [email protected]

A ileen Wang ，Risk A ssurance Partner (Sy stem Consulting) +8 6 (21) 2323 6655 a [email protected] Mea nwhile, you can also contact other mem bers of PwC’s Finance Tax Service: Bei ji n g Y i Li +8 6 (1 0) 6533 3085 y [email protected]

Oliv er Kang +8 6 (1 0) 6533 3012 oliv [email protected]

Y ijun Yang +8 6 (1 0) 6533 3208 y [email protected]

Ken ny Lam +8 6 (21) 2323 2595 ken [email protected]

T er ry Tam (US Tax ) +8 6 (21) 2323 1 555 t er ry.sy [email protected]

Der v is Pajo (US Tax ) +8 6 (21) 2323 1 577 derv [email protected]

Gu a ngzhou

Sh en zhen

In g rid Qin +8 6 (20) 3819 2191 in [email protected]

Cin dy Li +8 6 (7 55) 8261 8151 cin [email protected]

Kev in Huang +8 6 (7 55) 8261 8239 kev [email protected]

A n gelica Kwan (US Tax ) +8 5 2 2289 3966 a n [email protected]

A n thony T ong (US Tax ) +8 5 2 2289 3939 a n [email protected]

Pa u l Ho (US Tax ) +8 5 2 2289 3061 pa u [email protected]

W en dy Ng (US Tax) +8 5 2 2289 3933 w [email protected]

Ca thy Jiang (PRC Tax) +8 5 2 2289 5659 ca [email protected]

Ca therine Tsang ( PRC Tax) +8 5 2 2289 5638 ca [email protected]

Jer em y Ngai (PRC Tax ) +8 5 2 2289 5616 jer [email protected]

Da v id McDonald +8 5 2 2289 3707 da v [email protected]

Da v id Kan +8 5 2 2289 3502 da v [email protected]

Flor ence Y ip * +8 5 2 2289 1833 flor [email protected]

KK So +8 5 2 2289 3789 [email protected]

Ph illip Ma k +8 5 2 2289 3503 ph [email protected]

Rex Ho ** +8 5 2 2289 3026 r ex [email protected]

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Scot t Qian +8 6 (1 0) 6533 3129 scot t .qian @cn.pwc.com Sh a nghai

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Pu ay Lee +8 5 2 22893828 pu [email protected]

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China Finance Tax News Flash * The in-charge Tax Partner of Finance Service and Asset Management in Asia, and the in-charge Tax Partner of PE Fund in the greater China ** The in-charge Tax Partner of Hong Kong Finance Service and Asia Insurance *** The in-charge Tax Partner of China Finance Service PwC’s professional service team for Finance Tax Service and Business Advisory Service We hav e the professional team providing tax advisory services to finance clients. The team comprises of experienced tax professionals, who have deep insights in finance service tax and business issues, including international finance transactions, avoidance of risk for permanent establishment, and transfer pricing, etc. Connecting with the powerful international network of PwC, the team provides perfect solutions for clients’ current business operations and future development.

© 2015 PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, “PwC“ refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member of PricewaterhouseCoopers International Limited, each member of which is a separate legal entity. Refer to www.pwc.com/structure for details. HK-20130502-1-C1