VAT Reform in China Extended to 11 Provinces/Cities

On July 25th, 2012, the State Council of China held its standing meeting and approved to extend the Value Added Tax (“VAT”) reform.

From August 1st to December 31st, 2012, the transformation from Business Tax (“BT”) to VAT in transportation industries and certain modern service industries will be launched in 8 provinces and 2 cities as follows: Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen. Therefore, there will be 11 pilot areas at the end of this year, including Shanghai in which the VAT reform was first launched on January 1st, 2012.

Besides the further extension of pilot areas, the State Council also noted that VAT reform in selected industries will be promoted nationwide in the next year.

This approval is part of China's long-term effort to rebalance the economy from one that relies heavily on manufacturing and exports to one dependent on domestic consumption. The detailed implementation rules for VAT reform in the 10 new pilot areas will be issued by local tax authorities.

by UBILLA & CIA

A Special Zone in the Special Economic Zone: China Officially Approved the Policies for Developing and Opening Qianhai Zone

On June 27th, 2012, the State Council of the People's Republic of China (“PRC”) issued a written Reply concerning the Policies for Developing and Opening the Shenzhen-Hong Kong Modern Service Sector Cooperation Zone in Qianhai, Shenzhen (hereinafter referred to as the “Reply”). The policies provided in the Reply are more special than those that apply to Shenzhen Special Economic Zone (“SEZ”).

The Reply approved 22 advance and trial policies in the following six fields:

1. Finance

• 1.1. Allow Qianhai to explore the expansion of offshore RMB fund flow-back channels, with the support of Hong Kong RMB offshore business development, and establish an innovative experimental zone for cross-border RMB business.
• 1.2. Support the granting of RMB loans for offshore projects by banking institutions established in Qianhai. Under the framework of Mainland-Hong Kong Closer Economic Partnership Arrangement ("CEPA"), conducting studies on the granting of RMB loans by Hong Kong-based banking institutions for enterprises and projects established in Qianhai.
• 1.3. Support qualified enterprises and financial institutions registered in Qianhai to issue RMB bonds in Hong Kong within the quotas approved by the State Council to support the development of Qianhai.
• 1.4. Support the establishment of the fund of equity investment funds in Qianhai.
• 1.5. Support the innovative development of foreign-invested equity investment funds and actively explore new modes of foreign exchange settlement of capital funds, investment and fund management.
• 1.6. Allow Qianhai financial market to open the door wider to Hong Kong.
• 1.7. Support the establishment of innovative financial institutions in Qianhai.
• 1.8. Support the establishment of international or national management headquarters or business operation headquarters by Hong Kong and other onshore and offshore financial institutions.

2. Taxation

• 2.1. Qualified enterprises will be entitled to a reduced enterprise income tax (“EIT”) rate of 15 percent based on the relevant catalogs to be formulated by competent authorities.
• 2.2. Qualified foreign talent who works in Qianhai can enjoy subsidy concerning Individual Income Tax ("IIT") and this subsidy is not subject to IIT.
• 2.3. Qualified modern logistics enterprises registered in Qianhai can enjoy the preferential Policy on Business Tax ("BT").

3. Law Practice

• 3.1. Explore the establishment of branches of Hong Kong arbitration institutions in Qianhai.
• 3.2. Strengthen the cooperation between law firms in Mainland and those in Hong Kong, explore the forms of their joint-operation and implement all the open measures to Hong Kong under CEPA.

4. Talent

• 4.1. Innovate management mechanism and develop relevant measures and policies to provide facilities for all kinds of talent who works in Qianhai
• 4.2. Include Qianhai into the trial areas in Guangdong regarding the mutual recognition on professional qualification.
• 4.3. Allow professionals who obtained Hong Kong practicing qualifications to provide services to Qianhai enterprises and residents in Qianhai.
• 4.4. Allow Hong Kong professionals who obtained the qualification as Chinese Certified Public Accountant ("CPA") to be the partners of Mainland CPA firms in Qianhai.

5. Education and Health Care

• 5.1. Allow Hong Kong service providers to establish international schools in the form of Wholly Owned Foreign Enterprise ("WOFE") in Qianhai after obtain the relevant approval.
• 5.2. Allow Hong Kong service providers are to establish hospitals in the form of WOFE in Qianhai.

6. Telecommunications

• 6.1. Allow Hong Kong and Macao telecommunications service providers to establish joint ventures in Qianhai Zone with Mainland telecommunications service providers under CEPA.
• 6.2. Encourage the Innovation in telecommunications management modes and allow local telecommunications service providers to explore preferential charge schemes based on the practical situation in Qianhai.
• 6.3. Allow the establishment of a special international communication channel in order to meet the demand of Qianhai enterprises.

General Comment:

The Reply officially approved the Qianhai Zone with the aim of making it serve as an experimental business zone for better interaction between Mainland China and Hong Kong in the financial, logistics, and IT services sectors. Therefore, the preferential treatment to Hong Kong is very clear. Besides, financial liberalization is the center piece of the Reply, including the promotion of RMB as an international currency.

However, the detailed regulations and rules for the implementation of the Reply are yet to be developed by different competent authorities. Currently, there are no schedules regarding the issuance of these detailed regulations and rules. Therefore, what kind of influence will the policies in the Reply have, especially on RMB Internationalization, is still an open question.

by UBILLA & CIA