Member Article

The State Administration of Taxation issued the Urgent Notice of the State Administration of Taxation on Relevant Issues in Strengthening the Administration of the Levy and Collection of Value-Added Tax for Newly Established Commercial and Trading Enterprises on 13 August 2004. The Urgent Notice, which entered into effect on 1 August 2004 (except for a few sections which became effective only on 13 August 2004), appears to raise the threshold for investment in the commercial and trading sectors in China. General versus small taxpayer The stated purpose of the Urgent Notice is to prevent tax evasion and tax fraud with value-added tax (“VAT”) invoices. To achieve this purpose, the Urgent Notice proposes a differentiated treatment for commercial FIEs: • A new small commercial and trading enterprise is treated as a small taxpayer in the first year. It may obtain general VAT taxpayer status if its sales volume within a year reaches the threshold of RMB 1.8 million. Its status is subject to a probation period of not less than six months. • A new retail enterprise with a fixed business venue and physical goods or a new large and medium sized commercial and trading enterprise with registered capital of at least RMB 5 million and 50 or more staff can be recognised as a general VAT taxpayer when making its tax registration. Its status is subject to a probation period of not less than six months except if it is a new large and medium sized commercial and trading enterprise with a large business scale, a fixed business venue, fixed sourcing and distributing channels and a sound management and accounting system. The Measures for the Administration of Foreign Investment in the Commercial Sector 外商投资商业领域管理办法 specify the minimum registered capital requirements of commercial enterprises with foreign investment (“commercial FIE”). The minimum registered capital of a commercial FIE principally engaged in wholesale business is RMB 500,000 and that of a commercial FIE principally engaged in retail business is RMB 300,000. However, the effect of the Urgent Notice seems to be to impose on a new commercial and trading enterprise (including a commercial FIE) the far higher registered capital requirement of RMB 5 million in order to qualify as a general value-added taxpayer. During the probation period, commercial and trading enterprises are subject to various restrictions: • a small commercial and trading enterprise may only issue single VAT invoices for a maximum amount of RMB 10,000 and may only purchase a maximum of 25 invoices at a time • a retail enterprise and a large and medium sized commercial and trading enterprise will have the tax authority in charge determine the maximum amount for which a single VAT invoice may be issued and it may only purchase a maximum number of 25 invoices at a time • if the allotted maximum number of invoices is not sufficient to cover its needs for a particular month, an enterprise may purchase additional VAT invoices upon pre-payment of 4% of the VAT on the total sales amount of the already issued VAT invoices • if the allotted maximum number of invoices is not used up within a particular month, the total of invoices that can be purchased the next time is reduced by the number of unused invoices.