China Taxation - New VAT Rate For Biological Products

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This article looks at the reasons behind the newly announced reduction in VAT for biological products by the Chinese government.

On June 13, the Ministry of Finance and the State Administration of Taxation co-issued the Policy of Streamlining and Combination of Value-Added Tax Levy Rates. It stipulates that the VAT rate is adjusted in a unified manner from 6% and 4% to 3%. In accordance with the said Policy, the VAT rate for biological products is adjusted to 3% from 6%.

Basic Information on the Streamlining
and Combination of VAT

After July 1, Value-Added Tax (“VAT”) rate for the biological products that is made of microorganism, SMPs, animal toxin and blood/tissue of human or animal is adjusted to 3% from 6%. It is estimated by insiders that such adjustment definitely would have an effect of tax deduction on and benefit relevant biopharmaceutical companies.

By comparing with enterprises in other industries, the deductable direct materials cost of biopharmaceutical companies that manufacture the aforesaid products takes low percentage of total cost due to different cost structure; whereas the indirect cost thereof takes a great percentage of the total cost, such as R&D fee, technology development fee, pilot scale fee etc. Such indirect cost cannot obtain VAT invoice and deduct income tax account. Under such circumstance, the more advanced technology bio product contains, the heavier the tax burden of the company is. In order to encourage development of biopharmaceutical companies, the government stipulated that the VAT rate for the abovementioned products can be levied on 6% in a noticed issued in 2009. This June, the joint issued Policy further adjusted the VAT rate to 3% from 6% which is good news for the development of biopharmaceutical companies in China.

Reason for Making the Policy and Possible Effect

It is fair to say that this policy is a positive move made by the Chinese government in the VAT reform which started in 2009. In the past reform, the tax rate for small scale taxpayers had been unified and reduced to 3%; however, the VAT rate for certain normal taxpayers (including biopharmaceutical companies) has not been adjusted yet. After this simplified and unified tax rate adjustment, it can be deemed as solving outstanding issue of the VAT reform. Besides, such adjustment shows the government’s support in certain industries and it is an important measurement to regulate tax system and make a fair tax.

After the adjustment, the VAT rate for biological products in China is reduced to 3%, which is lower than most of the EU countries . In addition, if a biopharmaceutical company can meet the conditions of becoming a “new high-tech enterprise”, it can further be entitled to a 15% rate of business income tax whereas the normal rate is 25%.

Thus, in short-term, after the implementation of the Policy, tax burden of the biopharmaceutical companies in China will be relieved to some extent which also has positive effect on performance of those companies in the second half year of 2014 after the VAT rate adjustment. However, it still remains to be seen the long term effect of the Policy since the VAT rate is only one of the factors that affecting the performance of the pharmaceutical companies.

Fei Dang is an Associate in the MMLC Group in Beijing.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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