moondog

As intimated in the thread title, the audience for this topic on FT is probably close to zero. But, I'm posting here, rather than on some random finance bb, because this forum is my home.

Here's the deal:
-we recently started signing VAT exclusive contracts (i.e. customers pay VAT; we don't)
-the lazy (and widely accepted) approach to this matter is to gross up based on VAT+surtax, and then gross down by VAT
-this will get you pretty close to the right number (i.e. Y30 difference on Y200,000 transaction), but is not "exact", and "exact" matters at times
-the surtax is a fixed percentage (7% in our case) of the VAT
-it is necessary to add the surtax to the net if you want to pass it on (including it post VAT will destroy your numbers, and you won't get paid; this is far worse than the "lazy approach" mentioned above)

I googled this topic (accounting for surtax China) yesterday, and discovered that there was no useful advice out there. Our finance people, and our clients' finance people were also clueless.

Later, I sent out a bunch of emails to people who I thought might be clued in, and received the magic "gross up" formula from one person, which saved the day.

Eta: Formula deleted because I want to challenge you guys with this basic math. If any of you need the formula for your business, email me, and I'll provide a complete explanation in reply.

Basically, when we gross up the net by this number and go back down by /1.06, the resulting figure = net plus surtax (exactly).

anacapamalibu

Maybe you got a work around?

SCMP 9/30/16

" The Ministry of Finance, in a report to the National People’s Congress in late August, said that the amount of business tax – tax levied on sales of goods and services – collected in the first six months of this year jumped more than tenfold from a year ago."

moondog

1. Choose a business category in which 6% VAT applies, if possible
2. Don't aim for 3% VAT because this is useless for most clients
3. Establish your company in an area that has a low surtax (e.g. Shanghai Free Trade Zone)
4. Get 发票 for everything, even Starbucks

anacapamalibu

I think an across the board property tax of 2%
would solve the tax problem.

moondog

I agree, but the people in power happen to dislike this idea (because they own property).

JPDM

Looks like basic math to me.

moondog

That's what my boss told me. But, do you honestly think this stuff is basic math?

VAT = 6%
Surtax = 7%
Net = 10,000

Without utilizing the formula up thread, how would you go about including the surtax with the net? Just show me the gross and VAT; if you get to this stage, we can easily derive the other numbers (basic math).

moondog

@JPDM; I removed the formula from the OP in order to give you a chance to show us your basic math skills. I'm actually pretty solid at math (finance related, in particular), but the instant case completely stumped me...made worse by the fact that my boss claimed it was easy without trying himself.

Use the numbers from my previous post, and show us your gross- up formula, in addition to gross/VAT.

anacapamalibu

Asking customer to pay VAT is like a cc merchant asking customer to pay the cc fee.
Seems like it could be viewed as almost double dipping.
Brings to mind the phrase "neng pian jiu pian".

moondog

We are simply following PWC. If you want to eat the VAT, you are free to do so.

cxfan1960

That depends on the type of business. I am involved in some IP transactions. It is quite customary for Chinese customers to pay taxes on their side. I was also told that tax may also be different on whether it is a service instead of a piece of merchandise. I am not the expert on this though.

moondog

My boss's wife happens to be a tax partner at an accounting firm that all of us know well. Her advice was to exclude VAT from our invoices. Obviously, this sound advice. BUT, 6.42% simply doesn't pencil. Embedding the 7% surtax in the net is not "basic math". You guys are welcome to have a go at this.

cxfan1960

That worked in my case when I did a license agreement between my HK company and a Mainland client. It was spelled out in the agreement that the client would pay for all transaction-related taxes. They did that and I received the full amount in HKD. However, there are some bureaucratic delays (about 3-4 weeks) possibly due to cross-border non-RMB transactions.

moondog

Following is why adding the surtax to the VAT almost works (to the extent that you can get away with it on a one off basis), but fails with respect to accuracy:
-the surtax is based on the VAT
-using the 100,000 example above, you might think that grossing up to 106,420 is acceptable, but when you divide this by 1.06, your surtax will be off the mark by ~2%
-if you want to make perfect quotes, a proper gross up formula is required
-i provided the gross up formula in the OP, but later deleted it because I like the idea of testing your math skills

That having been said, if any of you have a need for this information, email me, and I'll be happy to assist (no charge unless your requirements are excessive). In addition to getting the numbers correct, I can help you make sure that your quotes contain all necessary information (e.g. client bank account and tax ID) to get paid. I must admit that I'm new to this game myself, but my quotes are increasingly beautiful.