In order to further standardise VAT accounting treatments and facilitate the implementation of the transformation from Business Tax (BT) to Value Added Tax (VAT) (the "B2V Reform"), the Ministry of Finance (MOF) issued the <Notice Regarding the Regulations on the Accounting Treatment of VAT> (Caikuai  No. 22, hereinafter referred to as "Circular 22") on 3 December 2016, after wide public consultation. Circular 22 re-standardises the accounting treatments for VAT-related transactions, which cover not only common VAT relevant business activities but also certain special ones, such as VAT calculation on a net basis, VAT treatment during transition period, export tax refund, tax incentives for small and thin-profit enterprises, etc. It also clarifies the reporting of such items on the statutory financial statements. Meanwhile, the VAT accounting treatment of any transaction occurred during the period from 1 May 2016 to 3 December 2016 has to be adjusted retroactively to conform to Circular 22 if Circular 22 would impact the amount of assets, liabilities, etc. recorded in the accounting books. Moreover, previous relevant VAT accounting regulations are abolished by Circular 22 simultaneously.
In this News Flash, we will introduce the new requirements for the set-up of VAT accounts, relevant accounting treatments and reporting on financial statements stipulated in Circular 22. We will analyse the significant changes from an accounting and tax perspective, as well as certain unclear tax issues and share our insights and recommendations.
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