Introduction
For Japanese companies and foreign companies operating in China, the Value Added Tax (VAT) is one of the most important tax compliance items.
China's VAT system is an indirect tax that, like Japan's consumption tax, is levied on added value, but there are significant differences in system design and tax management methods.
In particular, in China, the official invoice system known as "fapiao" is central to tax management, and if proper invoices cannot be obtained, input tax deductions may not be recognized.
Additionally, in recent years, the Chinese government has been modernizing and simplifying the VAT system, with ongoing changes such as tax rate adjustments, expansion of input deduction scopes, and the introduction of new VAT laws.
This article explains the basics of the Chinese VAT system and practical points that foreign companies, including Japanese companies, should understand when operating in China.
1. What is the Chinese VAT system?
The Chinese VAT is a circulation tax levied on the sale of goods, processing, repair, service provision, and import transactions.
Similar to Japan's consumption tax, the ultimate tax burden is borne by the consumer, and companies calculate and pay tax on the added value that occurs during the transaction process.
The basic calculation method is as follows.
The tax amount received at the time of sale (sales tax amount) is deducted from the tax amount paid at the time of purchase (input tax amount), and the difference is paid.
In other words,
Tax payable = Sales tax amount - Input tax amount
is the mechanism.
However, in China, unlike Japan's consumption tax, it is very important to obtain and retain qualified value-added tax invoices in order to receive input tax deductions.
2. Taxpayer Classification for China's Value-Added Tax
Taxpayers under China's value-added tax are broadly classified into "general taxpayers" and "small-scale taxpayers."
General taxpayers are companies that meet a certain scale and can utilize input tax deductions.
On the other hand, small-scale taxpayers are a system for relatively small businesses, applying a simplified calculation method.
Foreign-invested enterprises' local subsidiaries in China usually register as general taxpayers based on their business scale and transaction content.
Becoming a general taxpayer allows for input value-added tax deductions, making it an important tax decision in industries such as manufacturing, trade, and IT services.
However, the optimal taxpayer classification varies not only by sales scale but also by business content and transaction form, so careful consideration is necessary from the time of establishment.
3
. Main Tax Rates for China's Value-Added Tax
China's value-added tax rates are classified according to the nature of the transactions.
The main tax rates are as follows.
13%
Manufacturing, product sales, import transactions, etc.
9%
Transportation, construction, real estate-related, some agricultural products, etc.
6%
Financial services, modern services, information technology services, consulting services, etc.
Additionally, a simplified tax rate may apply to small-scale taxpayers.
For foreign-invested enterprises, it is important to accurately determine which tax rate category their products or services fall under.
In particular, for cross-border transactions involving IT services, consulting, technology licensing, and royalties, tax treatment may differ based on service classification.
4. Importance of Managing Value-Added Tax Invoices (Fapiao)
One of the key points that Japanese companies should pay attention to in China's value-added tax system is invoice management.
In China, invoices are not just bills; they are positioned as important evidence for tax authorities to manage transactions.
For general taxpayer companies to perform input tax deductions, it is necessary to obtain qualified value-added tax special invoices in principle.
For example, there is a risk of denial of input tax deductions in cases such as the following.
・The transaction content does not match the invoice content.
・The invoice issuer is different from the actual transaction partner.
・Necessary invoices have not been obtained.
・Invoice management is insufficient.
Therefore, it is important for the Japanese headquarters managing the Chinese subsidiary to manage not only accounting processes but also the invoice acquisition process and approval flow.
5. Response to China's Value-Added Tax Reform and New Value-Added Tax Law
In recent years, China has been advancing the unification and legalization of its value-added tax system.
Traditionally, many aspects of China's value-added tax system were operated under regulations and notices from the State Council, but efforts are being made to establish a value-added tax law to improve the system's transparency.
In December 2024, the "Value-Added Tax Law of the People's Republic of China" is scheduled to be promulgated and will come into effect in January 2026.
The new VAT law aims to organize existing practices at the legal level rather than making significant changes to the existing system, thereby enhancing the stability of the system.
For foreign companies, it is necessary to continuously confirm the following points.
・Which tax rate applies to their transactions
・Whether the costs are eligible for input tax deduction
・Whether the invoice acquisition process is appropriate
・Whether the ERP system complies with Chinese tax requirements
6. Key VAT Practical Points for Japanese Companies to Note in China
When Japanese companies operate subsidiaries in China, they need to pay attention to the following points regarding VAT.
First, while China does not have a system like Japan's "Qualified Invoice Issuer Registration System," invoice management is extremely important for tax purposes.
Additionally, transactions between the Japanese headquarters and the Chinese subsidiary raise the following tax issues.
・Royalty payments to the Japanese headquarters
・Provision of technical services
・Management service fees
・Import and export transactions of goods
For these transactions, it is necessary to consider multiple tax issues simultaneously, including VAT, corporate income tax, withholding tax, and transfer pricing regulations.
In particular, when the Chinese subsidiary pays costs to the Japanese headquarters, it is important to ensure that the contract terms match the actual services provided.
7. Main Differences from Japan's Consumption Tax
While the basic concepts of China's VAT and Japan's consumption tax are similar, there are significant differences in practice.
In Japan, a qualified invoice (invoice) system has been introduced, whereas in China, input deduction management has been conducted through the invoice system for some time.
Moreover, while Japan's system focuses on input tax deduction through record-keeping and invoice preservation, China's system is characterized by the management of invoice information within the tax system.
Therefore, if accounting personnel from Japanese companies apply Japan's consumption tax processing directly to manage Chinese accounting, errors may occur.
Summary
China's VAT system is an important tax theme that Japanese companies cannot avoid when expanding their business in the Chinese market.
In particular, the general taxpayer system, tax rate classification, input tax deduction, and invoice management are crucial matters that influence the tax compliance of Chinese subsidiaries.
Additionally, with the implementation of the new VAT law scheduled for 2026, it is expected that the transparency of China's VAT system will further increase as a legal system.
What is important for foreign companies is not just to understand the tax rates, but to build a comprehensive tax management system that includes daily transaction management, invoice acquisition, ERP processing, and inter-group transactions.