China’s 2009 VAT Reform: The Input-Tax Credit Gap in Printing Equipment Leasing

China’s new VAT regime took effect on January 1, 2009. Under a key provision, VAT paid on equipment purchases by companies could be treated as input tax and credited against output tax from product sales. The measure gave a clear boost to corporate investment appetite and cut the cost of buying equipment, fitting China’s push to expand domestic demand during the financial tsunami.

What did this policy shift mean for financial leasing in the printing sector? To weigh the pros and cons, it is necessary to look at the tax features of leasing for printing equipment.

Financial leasing lessees are mainly small and medium-sized enterprises (SMEs);

Lessee firms often rely on cash transactions and tend to have non-standard financial practices;

Leased assets are mostly confined to printing machinery from five imported equipment manufacturers, all of which are using Chinese funds to carry the risk of their credit sales;

At that time, only Shanghai Electric was a manufacturer with its own financial leasing company, using leasing to conduct credit sales;

The lessee first signs a purchase contract with the manufacturer and then completes financial leasing through a sale-and-leaseback structure.

Because SME finances are non-standard, printing equipment added through financial leasing does not need to be credited. And without such a credit, import-stage VAT on imported equipment—compared with earlier tax reduction and exemption policies—raises procurement costs.

Under standard procurement procedures, a company importing printing equipment can use the customs import-stage VAT payment certificate to offset VAT against sales VAT. As a result, the printing industry suffers no loss and gains no extra benefit. The reason: in the past, tariffs and import-stage VAT on imported equipment were largely exempt. Now VAT is levied, but it can be credited back against output tax generated when the goods are sold.

After China adopted VAT reform, the financial leasing industry ran into a difficult issue: to secure title to the leased asset, the buyer is usually the leasing company. But as a service institution rather than a general taxpayer, the leasing company cannot issue VAT invoices to the lessee. Tax authorities treat the leasing company as the final consumer, and the VAT chain stops there. The lessee cannot claim a credit using the special VAT invoice issued by the manufacturer to the lessor. Consequently, acquiring fixed assets made with domestic equipment through financial leasing costs more than direct procurement by printing companies.

Imported equipment offers a different advantage. First, the general invoice used is a commercial invoice issued by the enterprise, with several originals. Although it is addressed to the leasing company (in fact, it makes no difference to whom it is issued), it can be issued separately to the leasing company, import agent, lessee, customs, transport, insurance and other parties. Second, import-stage VAT is paid by the lessee, and the customs tax payment certificate is made out directly to the lessee. The lessee can therefore use it for a direct credit.

For financial leasing of domestically produced equipment, the format of the special VAT invoice prevents the lessee from using it for credit; such transactions do not enjoy the same treatment. The share of domestic-equipment financial leasing was already small. If this continues, it would amount to killing off the financial leasing transaction method for domestic equipment. That is highly unfavorable to the country’s goal of expanding domestic demand. Yet this is not a printing-industry problem alone; it affects the entire financial leasing industry. Although the industry has appealed to tax authorities and the authorities recognize the problem, no solution had emerged at the time.

One aim of VAT reform is to require enterprises, especially SMEs, to standardize their financial operations. On VAT credits, cash-heavy businesses may not care whether credit is possible. But they must pay 17% more in procurement taxes and fees than financially standard, credit-eligible companies. Going forward, cash-based transactions can no longer evade or underpay taxes.

— This article is reposted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-362134.html