Revelation from Lord Sumption and Sherlock Holmes

'The law is easy. Facts are complicated. Once one eliminates 95% of facts that are irrelevant, what the law should be is common sense. ' (Lord Sumption v Professor Graham Virgo debate at Cambridge University, per Lord Sumption)1

'I have no date yet. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.' (The Adventures of Sherlock Holmes, per Sherlock Holmes)

The key to solving a problem is to grasp its facts. Someone should have told me this two years ago.

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1. 'Those Who Wish to Practise Law Should Not Study Law at University'?(https://youtu.be/uMR1NIEifWM)

News updates: Accelerated Depreciation Policy Fine-tuned for Fixed Assets

On 20 October 2014, the Ministry of Finance and the State Taxation of Administration of China jointly issued Notice of Complementing Corporate Income Tax Policy of Accelerated Depreciation for Fixed Assets (Caishui [2014] No.75. or “Notice 75”)1.

According to Notice 75, for corporate income tax purposes, accelerated depreciation can be accomplished by way of either (i) full deduction, or (ii) shortened depreciation periods or accelerated depreciation methods.

Full deduction

Fixed assets are eligible for full deduction, rather than being annually depreciated, if they fall into one of the categories below:

1. The fixed asset has a unit cost equal to or less than RMB5,000; 
2. The fixed asset is apparatus or equipment purchased after 1 January 2014 for the specific purpose of research and development (“R&D”) and has a unit cost equal to or less than RMB1,000,000; 
3. The fixed asset is apparatus or equipment purchased by “small-scale or small-profit enterprises” belonging to the “6 designated industries”2 after 1 January 2014 for the dual purposes of R&D and manufacturing operation, and has a unit cost equal to or less than RMB1,000,000.

Shortened depreciation periods or accelerated depreciation methods

Fixed assets are eligible for shortened depreciation periods or accelerated depreciation methods. If they fall into one of the categories below:

1. The fixed assets is apparatus or equipment purchased after 1 January 2014 for the specific purpose of research and development and has a unit cost more than RMB1,000,000; 
2. The fixed asset is apparatus or equipment purchased by “small-scale or small-profit enterprises” belonging to the “6 designated industries” after 1 January 2014 for the dual purposes of R&D and manufacturing operation, and has a unit cost more than RMB1,000,000.

Prevailing tax policies on fixed assets are still applicable to fixed assets not falling to any of the above categories.

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1. 财政部 国家税务总局 关于完善固定资产加速折旧企业所得税政策的通知
(http://www.chinatax.gov.cn/n810341/n810755/c1260992/content.html)

2. The 6 designated industries are (1) biopharmaceutical manufacturing, (2) special equipment manufacturing, (3) railroad, marine, aerospace and other transportation equipment manufacturing, (4) computer, communications and other electronic equipment manufacturing, (5) instruments and meters manufacturing and (6) information transmission, software and IT services.

News updates: Shenzhen Lays Down VAT Exemption Rules for Small-scale Taxpayers

On 23 October 2014, the Shenzhen Municipal Office of the State Administration of Taxation (“SZ SAT”) issued Announcement on Exemption of VAT Small-scale Taxpayers and Related Issues (SZ SAT Announcement [2014] No.15, or “Announcement 15”)[1] in response to relevant circulars issued by the SAT at the state level.

Pursuant to Announcement 15, VAT small-scale taxpayers are exempt from VAT if their quarterly sales are equal to or less than 60,000 yuan. For VAT small-scale taxpayers with quarterly sales ranging from 60,000 to 90,000 yuan, VAT is also exempted for the period from 1 October 2014 to 31 December 2015. 

In China’s VAT regime, VAT small-scale taxpayers are to be contrasted with VAT general taxpayers. VAT small-scale taxpayers are generally subject to VAT at 3% on their sales with neither deductions of input VAT credits or issuance of VAT invoices allowed. VAT general taxpayers, on the other hand, are subject to a diverse range of VAT rates and have neither of the aforementioned restrictions on small-scale taxpayers regarding VAT credits and invoice issuance. To qualify for VAT general taxpayers, taxpayers shall meet the standard of either operation scale, or adequate accounting system.

Announcement 15 also dictates that VAT small-scale taxpayers in Shenzhen shall lodge their VAT returns on a quarterly basis. And the above-said exemption is applicable to VAT small taxpayers which also include both sole proprietors and individuals with temporary tax registrations, and which file their returns quarterly.

Also, VAT exemptions may also be available for VAT small-scale taxpayers when they just turn VAT general taxpayers. In the event that a VAT small-scale taxpayer qualifies for, and is recognized as, a VAT general taxpayer within a tax filing quarter, VAT shall be exempt for this tax filing quarter, if in the month preceding to the month when the VAT general taxpayer status takes effect, the taxpayer is a VAT small-scale taxpayer with its sales in that preceding month less than or equal to 30,000 yuan. 

Besides articulating the requirements for the VAT exemption, Announcement 15 also touches on the procedural and administrative issues such as invoice issuance and tax filing. Specifically, it reiterates that VAT small-scale taxpayers are not allowed to request tax authorities to issue “VAT special invoices” (which can be used by purchasers/service recipients to credit against their own VAT liabilities) on their behalf for the VAT exempted sales or services. Instead, tax authorities can only issue “VAT ordinary invoices” (which cannot be credited against one’s VAT liabilities) on VAT small-scale taxpayers’ request and behalf with no prepaid tax imposed thereon.

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[1] 深圳市国家税务局关于增值税小规模纳税人免征增值税有关事项的公告 (http://www.szgs.gov.cn/szgs/tzgg/201410/9be050fea0534b1ab092bb85f6cacd19.shtml)