CHINA'S cancellation of duty exemption on imported equipment has led to increased calls for it to change its value added tax system to reduce increasing costs for foreigners investing on the mainland.
Although Beijing has yet to officially announce when the tax-free preferential treatment will be scrapped, it is generally expected to begin in January when custom duties and VAT will be charged on imported equipment.
Arthur Andersen partner Becky Lai said: 'As China's VAT is not a fully creditable system, the import VAT on equipment cannot be offset.' She said the deciding factor in whether Beijing opted to follow practices in European countries in making VAT fully creditable would be its fiscal strength.
China's VAT system allows a manufacturer to pay to the state the balance of output VAT on the sale of tangible goods, after offsetting the input VAT on raw materials.
But it is not a dollar-for-dollar arrangement for the import VAT on equipment, which is counted as costs of the fixed assets.
The costs can only be deducted from taxable income as depreciation expenses, therefore investors can recoup part of the costs by paying lower income tax.
Foreign investors will see their investment costs rise after China scraps preferential treatment on custom duty and VAT on imported equipment.
