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The VAT transformation reform allows the input credit for the purchase of capital equipment to be offset against the output VAT. That will eliminate the double taxation resulting from the adoption of the production-type VAT system, reduce the
tax burden for investment in capital equipment, and a major tax cutting policy without introducing a change in the urrent tax rates. Since it can avoid double tax in the purchase of capital equipment, it will encourage investment, increase the demand in the domestic market, promote technological advancement, adjust the industry structure and the transformation pattern of the economic growth. Currently, the financial tsunami triggered by the sub-prime mortgage crisis has spread to Europe,Asia, and Latin America. Global economic growth rate has obviously been slowed down. Some countries have shown signs of economic recession. The financial crises have adverse impact on the real economy.

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1. Legal authority
2. Resident and non-resident
3. Taxation on foreign investment enterprises
4. Taxation on foreign enterprises
5. Tax incentive

Legal authority

The PRC Tax Law for Foreign Investment Enterprises and Foreign Enterprises its Detailed Implementation Regulations

The PRC Tax Levy and Administration Law and its Detailed Implementation Regulations

Tax residents and non-tax residents
FIE’s are tax residents under the PRC Tax Law and therefore they are subject to tax on world-wide income. FE’s are non-tax residents and therefore subject to income derived from sources inside China only. Non-residents are not entitled to the benefit of avoiding double tax on income, as provided under the fax treaty entered into between the PRC and other countries.

Taxation on Foreign Investment Enterprises (FIE)

Tax rates applying to FIE’s
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The first is to allow deduction of the input VAT for purchased fixed assets. Before the amendment, input VAT is not allowed to get deducted from the output VAT. The production type VAT system is adopted and that has increased the tax burden of the enterprise buying the machinery and equipment. To reduce the tax burden, the revised VAT regulations remove the practice of such non-deduction, and allow the taxpayer to deduct the input VAT for purchased fixed assets. That helps achieve the transformation of the production type VAT system to one of consumption type.

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