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What multinationals need to know about compliance in China
An interview between Vishal Patel, Director Solutions Marketing, and Heinrich Clausen, VP of Product, Tradeshift China. In addition to this interview, Clausen authored a paper–available at the bottom of this interview–that provides more detail for those interested in better understanding invoicing compliance in China. After initiating the largest tax reform in decades in 2012, the Chinese government began implementation earlier this year. Given the seminal shift from the previous business taxes (BT) to the value-added tax (VAT) model, global companies should be paying keen attention. First and foremost is how to adjust to the new structure and stay compliant. Tradeshift’s unique market position and proprietary technology offer an authoritative perspective on the topic. In this post, we’ll extrapolate learnings from our customers and discuss how other multinationals can successfully adopt the e-invoicing needed for the updated tax code and even bring their entire procure-to-pay process into line. Vishal Patel: What do multinationals need to know about the VAT reforms in China? Heinrich Clausen: First of all they should understand the overall goal of the VAT reform is to help transition China from primarily being a production-based country to being services oriented. Though the reform is aimed at providing stimuli primarily to the services industries, overall it is expected the reform will reduce indirect taxes for all industries. The reform changes the indirect tax system in China from being a dual system with both provincial business taxes and VAT to a single system. The provincial business taxes have been applied to services but are now being phased out. All indirect taxes now align on VAT, bringing China into step with international practices (VAT being the norm in more than 140 countries). On May 1st 2016, electronic invoices were allowed to replace paper invoices and on that date Tradeshift went live with multiple customers within the banking and insurance industries. Besides electronic invoicing now being a reality in China, the Chinese State Administration of Taxation has announced the promotion of electronic invoices and is actively pushing the transition to electronic invoices. VP: What does it mean for multinationals operating within China? HC: From a practical perspective they will have to implement the VAT reform for their operation in China. From a business perspective they will need to assess the financial impact of the reform and adjust their business model and pricing methods. Also, the current supply chain needs to be evaluated including reviewing existing contracts both with a focus on the impact on transactions within China, but also on import and export–including clarification of responsibilities of e.g. VAT filing. Multinationals will have to assess the manner in which they receive and issue invoices within China. VP: What should they be concerned about most? HC: They should not see the VAT reform as simply an isolated change that requires a one-time investment in adapting their operation, but the reform should be understood in an overall context of the goal to modernize the Chinese tax system. Hence the VAT reform, though significant, is just one step in this modernization process and other changes should be expected. Another thing to be concerned about is the speed at which the reforms are being implemented, I would not be surprised to see fines and penalties coming soon for non-compliance. VP: How does this affect issuers of invoices? HC: First of all it requires the ability to issue VAT invoices. In China, VAT invoices are a highly-regulated area and only governmentally-approved systems can be used to issue VAT invoices. This is one reason Tradeshift has entered a joint venture with one of only two companies in China that are authorized to implement and market these systems. VP: How does this affect companies receiving invoices? HC: Since VAT on both products and services can now be re-claimed it is important that invoices are so-called “special VAT invoices” and that your AP processes handle these in a compliant way including verifying the authenticity of received invoices using the governmental tax services referred to as “The Golden Tax System.” At the same time, it is important to realize that the change also opens up significant optimizations of the AP processes, including areas like authentication of invoices and the actual process for re-claiming ingoing VAT. The process of authentication is extremely cumbersome today and shared service organizations would do well to find technology solutions that are equipped to handle this. Tradeshift’s platform has been extended on both the supplier side and buyer side to interact with the central tax system for both issuing invoices and doing the required validation of authenticity on the buyer side. VP: This reform was implemented in May, what other changes are expected? HC: As mentioned already multinationals should expect more changes in general, but we’re already seeing a significant push from the government on e-invoicing. On May 1, 2016 a policy change allowed e-invoicing to replace paper invoices for so-called general VAT invoices, but we are already seeing significant push to get companies to completely replace paper with electronic invoices. In some areas like the telecom industry e-invoicing is becoming mandatory while in other areas the access to paper invoicing is being limited and/or costs are added to paper invoicing. Besides, we also expect that e-invoicing will be allowed for special VAT invoices going forward, which is a natural next step. Going forward, I expect more industries to face mandates on both the receiving and issuing side. VP: Is China likely to follow the approach LATAM has taken around mandatory e-invoicing? HC: Yes, this is already happening in the telecom industry and all policy changes we see indicate that China is moving quickly in the direction of e-invoicing mandates. Some provinces have simply started to ration and/or charge for the invoice paper that is needed to issue invoices. VP: Tell us a little about the JV Tradeshift has with Baiwang. How many customers? HC: The initial priority of the JV was to get ready for the May 1st 2016 deadline which was the date the VAT reform was fully implemented and when the policy change allowing e-invoicing took effect. We went live with 4 enterprise customers on the first day and as of today (June 28th), we have 35 enterprise customers live. Our current focus is both to roll out our services to Baiwang’s existing customers in the enterprise segment but also to enter completely new market segments at high speed. At the same time we are spending most of our R&D resources on significantly expanding our service offerings targeting the Chinese market. Thanks to our team in Suzhou, China, Tradeshift is making significant strides in the Chinese market not only with local businesses but with our multinational customers. This should be a priority topic for any multinational operating in China as it directly impacts shared service operations and processes. As we already know from the LATAM e-invoicing mandates, things change often and organizations must keep up. With China, the sooner the better. If you’re interested in learning more, download the report for more detail on the Chinese reforms and how global businesses can prepare.