Telecoms Prepare to Answer Tax Man's Call

(Beijing) -- As the central government accelerates its efforts to reform the country's tax system, a pilot program to change collection methods for businesses is expected to expand soon and will probably cover the telecoms sector.

The State Council, the country's cabinet, said in early May that a nationwide switch from a business tax to a value-added tax (VAT) should be completed by 2015, a move designed to reduce tax burdens.

The government launched a tax pilot in Shanghai in January 2012. The program was expanded to cover transport and service industries in ten provinces in August that year.

The cabinet then released a schedule to further expand the pilot nationwide for the transport sector and part of the service industry on August 1. The program is also set to cover railway and telecom industries soon.

In mid-April this year, the finance minister, Lou Jiwei, and the director of the State Administration of Taxation, Wang Jun, said at a press conference that the many branches and complicated business structures of the railway and telecoms industries were the main obstacles to launching the pilot.

But Lou said the ministry and tax administration were working on reform plans for the two sectors that were expected to be issued no later than early 2014.

The switch from a business tax to a VAT will greatly test the top three telecom operators' financial management capacity. A source from China Unicom said it had started making preparations in the second half of 2012.

Wang Jun, a partner at Beijing-based Wisemove Tax Agent Co., predicted that the change for the telecoms industry would be launched after the program for transport and services industries was adopted nationwide.

The Challenges

Data from the Ministry of Finance and tax administration shows that by the end of February, 95 percent of the companies that participated in the pilot program to convert from a business tax to a VAT have seen their burden reduced or remain unchanged. The total savings for businesses was more than 55 billion yuan. Some 5 percent of the companies reported that their payments rose.

At the end of 2012, an inspection team in Shanghai found that 59 percent of transport companies said their tax burden rose after the conversion.

However, since a detailed conversion plan and tax rates for telecoms industry had not been settled, it was unclear how the program will affect the companies' financials.

The pilot plan approved by the State Council in 2011 stipulates that rental businesses would a pay 17 percent VAT, while transport and construction business would pay 11 percent. The VAT rate for the service industry would be 6 percent.

Industry insiders predict that the telecoms companies will get an 11 percent rate. An employee from China Telecom's financial department said that if the company was given the 11 percent rate, its tax burden would rise and profits could fall by up to 10 percent.

Wang said the crucial question for telecoms companies was whether tax officials would give different aspects of their business different tax rates. Some telecoms business could be treated as services enjoying a 6 percent VAT, Wang said.

A source from China Unicom said the three telecoms companies were in talks with the finance ministry and the tax administration about varying tax rates. China Unicom was trying to persuade tax officials to grant telephone, Internet and message services the 6 percent rate, the source said. 

Meanwhile, the telecoms companies are busy adjusting their financial management in preparation for the new policies. An employee at China Unicom's Shandong branch said it was reviewing its suppliers and making efforts to standardize purchase invoices in order to get higher tax deductions under the new policy.

For telecom companies, spending on equipment, maintenance, advertising, office supplies, and water and electricity tariffs is eligible for a deduction. However, since procurement activities are dispersed in different branches, some have failed to meet the requirements for tax deduction due to problems with invoices, the source said.

In addition, the telecoms companies are also tightening management of receivables to reduce bad loans and tax payments.

The source at China Telecom said the company started examining its existing service contracts. Previously, many bad loans were also included in the company's revenue and pushed up tax payments due to lose management.

Li Yi, a telecoms researcher at the Ministry of Industry and Information Technology, said the switch from a business tax to a VAT would force telecoms companies to be more precise in their business operations and strengthen internal management.

The new tax regime is causing other headaches for telecoms companies.

The companies have competed to launch special offers to attract customers, offering free mobile phones or other gifts. How these expenses will be calculated under the new policy remains unclear.

Under current tax regulations, such gifts are exempted from both the business tax and the VAT.

Sources from telecom companies said they were unlikely to transfer cost increases to customers due to fierce competition.

Hu Genrong, a tax expert at accounting firm PricewaterhouseCoopers, said that without raising service charges, the telecoms could only adjust to increases in their tax payments by reducing internal costs or pressing suppliers to cut prices. The government could also offer subsidies to alleviate pressure.

The change was not only a test for telecom companies' financial management capacity, but would also require them to improve their business models and daily operation, Hu said.

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