For basic telecom services such as fixed network telephone services, mobile services and voice-over internet protocol services (VOIP) and value added services such as providers of online data processing (online banking, auctions, payment processing), data storage services, internet information services, data hosting, internet access services and call centres the VAT rate of 11% and 6% respectively replaced the 3% business tax as from 1 of June 2014. The telecommunication sector is heavily regulated in China. The strongly regulated area of basic telecom services is dominated by state owned companies like China Mobile, China Telecom and China Unicom providing services to over 1.3 billion customers. China aims to expand VAT to cover all sectors that are still subject to business tax before the end of the 12^th five year plan period (2011-2015). Before the extension to the telecoms sector, China’s VAT pilot program covered transportation, postal and some modern services sectors with rates between 6% to 17%.

China has very strict controls on the issuance of tax invoices. There are two main types of invoices – special and general VAT invoices both issued through the “Golden Tax System”. VAT can be claimed back only if the taxpayer is in the position of special VAT invoice. Due to the high number of the special VAT invoices which will be needed to be issued it might be challenging to have robust and efficient system.

Fitch Ratings expects that the VAT changes will lead to the cut of the annual EBITDA of China’s Mobile’s and China’s Telecom’s company by 8-10% for the next two to three years. The reason is that staff costs and depreciation make up a substantial part of telecoms operators’ cost structure but these are not VAT deductible and only a small proportion of operators’ distribution and marketing expenses is tax deductible.

For further details please contact:

Alan Wu
Phone: +86 (10) 6533 2889
Email alan.wu@cn.pwc.com