Sino Grandness

(27-01-2016, 04:13 PM)Oldman9 Wrote:

(27-01-2016, 10:47 AM)Boon Wrote:

(27-01-2016, 08:13 AM)Oldman9 Wrote: Hi Boon

In your post 1123 dated 22nd Jan you said "Also, I don’t see why VAT (for purchase of equipment for factory A) could not be deducted against output VAT (for selling beverage produced by factory B) – if both factory A & B are owned by the same entity.". A day later in post 1127 , you said "I do understand that VAT is not administered on group basis in China".

How can this two statements  be consistent? Friends are  puzzled when you say they are not inconsistent.

Cheers
Oldman9

Hi Oldman9,
 
Let's approach it this way:
 
Company X owns factory A and factory B.
Company Y owns factory C and factory D.
Company X and Y are two separate legal entities owned by Company Z.
 
What is your take on the following two questions? Yes or no, and why?
 
Question 1:
Can input VAT (for purchase of equipment for factory A) be deducted against output VAT (for selling beverage produced by factory D)?
 
Question 2:
Can input VAT (for purchase of equipment for factory A) be deducted against output VAT (for selling beverage produced by factory B)?
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Hi Boon

Hope you are not wriggling out by posing questions back. haha.

Unlike you I am no expert here...but according to Portusers post
"
You may want to refer to page 17 of  "China: Country VAT / Business Tax Essentials Guide 2015" by KPMG which states:

"Is VAT /Business Tax grouping possible?
No - grouping of different legal entities is not generally possible in China:"

So I believe the answer to both your question is No. Maybe you have a better answer.

cheers
Oldman9

Hi Oldman9,
 
Rest assured that I am not wriggling out………ha-ha!
 
The basis for answering “NO” to question 1 is : Grouping of different legal entities is not generally possible in China.
 
What is your basis for answering “NO” to Question 2, since it is not the case of grouping of different legal entities?
 
When I said -  “I do understand that VAT is not administered on group basis in China."- I am referring to “no grouping of different legal entities is allowed”.
 
And based on this understanding, I make a further statement to argue that " I don’t see why VAT (for purchase of equipment for factory A) could not be deducted against output VAT (for selling beverage produced by factory B) – if both factory A & B are owned by the same entity.” – as we are NOT talking about grouping of different legal entities here.
 
So where are the inconsistencies in my argument?  
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Boon

You might not have read:
"Sino Grandness sets up subsidiary to build and own new factory" in post 1118  

That oversight might have led you to state (in post 1123):
"I don’t see why VAT (for purchase of equipment for factory A) could not be deducted against output VAT (for selling beverage produced by factory B) – if both factory A & B are owned by the same entity." 

In Sino Grandness group, no subsidiary owns more than one factory. 

(27-01-2016, 11:18 PM)portuser Wrote: Boon

You might not have read:
"Sino Grandness sets up subsidiary to build and own new factory" in post 1118  

That oversight might have led you to state (in post 1123):
"I don’t see why VAT (for purchase of equipment for factory A) could not be deducted against output VAT (for selling beverage produced by factory B) – if both factory A & B are owned by the same entity." 

In Sino Grandness group, no subsidiary owns more than one factory. 

Thanks portuser.
 
Ha-ha ! This is getting more interesting.
 
My answer to Question 1 is also “NO” – I concur with Oldman9 on the basis of my understanding that grouping of different legal entities is no allowed in China. I presume your answer to question 1 would be the same.
 
But what is your answer to question 2 ?
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Boon

I do not think it is worthwhile to prolong discussion on the subject of VAT group offsetting as the facts about Sino Grandness are very clear.

First, subsidiaries are separate legal entities responsible for their own VAT.

Second, the Hubei factory is owned by the subsidiary specially set up for the construction.  Input VAT of this subsidiary cannot be offset against output VAT of any one of the operating subsidiaries.

(28-01-2016, 02:24 PM)portuser Wrote: Boon

I do not think it is worthwhile to prolong discussion on the subject of VAT group offsetting as the facts about Sino Grandness are very clear.

First, subsidiaries are separate legal entities responsible for their own VAT.

Second, the Hubei factory is owned by the subsidiary specially set up for the construction.  Input VAT of this subsidiary cannot be offset against output VAT of any one of the operating subsidiaries.

portuser,

No, it is not over yet with VAT grouping.
 
"Firstly, subsidiaries are separate legal entities responsible for their own VAT."
 
So I take it that your answer to question 2 is “yes”
 
Oldman9’s answer to question 2 is “NO”, but I am waiting for his basis.
 
Be ready for more surprise on VAT grouping !
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“I do understand that VAT is not administered on group basis (of different legal entities) in China. Therefore, I don’t see why VAT (for purchase of equipment for factory A) could not be deducted against output VAT (for selling beverage produced by factory B) – if both factory A & B are owned by the same entity.”
 
The above argument does not contradict itself – hence it is an internally consistent argument.
 
Internal consistency has nothing to do with facts about the real world – whether Sino has subsidiary owning more than one factory.
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(28-01-2016, 05:38 PM)Boon Wrote:

(28-01-2016, 02:24 PM)portuser Wrote: Boon

I do not think it is worthwhile to prolong discussion on the subject of VAT group offsetting as the facts about Sino Grandness are very clear.

First, subsidiaries are separate legal entities responsible for their own VAT.

Second, the Hubei factory is owned by the subsidiary specially set up for the construction.  Input VAT of this subsidiary cannot be offset against output VAT of any one of the operating subsidiaries.

portuser,

No, it is not over yet with VAT grouping.
 
"Firstly, subsidiaries are separate legal entities responsible for their own VAT."
 
So I take it that your answer to question 2 is “yes”
 
Oldman9’s answer to question 2 is “NO”, but I am waiting for his basis.
 
Be ready for more surprise on VAT grouping !
____________________________________________________________________________________________________________________________________
 
“I do understand that VAT is not administered on group basis (of different legal entities) in China. Therefore, I don’t see why VAT (for purchase of equipment for factory A) could not be deducted against output VAT (for selling beverage produced by factory B) – if both factory A & B are owned by the same entity.”
 
The above argument does not contradict itself – hence it is an internally consistent argument.
 
Internal consistency has nothing to do with facts about the real world – whether Sino has subsidiary owning more than one factory.
______________________________________________________________________________________________________________________________________

Hi Boon,

The answer to question 2 is not so simple and would depend on factors such as the location of the factories (they might be situated in different provinces) even though they belong to the same subsidiary.

In any case, Sino Grandness incorporates a company for each of its factory. Garden Fresh Hubei plant is incorporated under "GardenFresh (Hubei) Food & Beverage Co., Ltd." 

There are no instances whereby Sino Grandness has more than one factory in a subsidiary, therefore question 2 is a discussion on accounting principles and not pertaining to Sino Grandness.

Hi Mr Boon,

I read your post 1123 several times.

Your point:
"Also, I don’t see why VAT (for purchase of equipment for factory A) could not be deducted against output VAT (for selling beverage produced by factory B) – if both factory A & B are owned by the same entity."
was made to counter Portuser point:
"The newest operating factory you referred to is the Hubei factory costing around RMB 500m. The factory will have to sell RMB 500m worth of products to wipe off the trade receivables paid for the construction."

You were asking why Hubei factory has to wait for its own output VAT to offset input VAT paid for equipment; and why not straightaway offset input VAT against output VAT of another factory that is already selling beverage.

Were you mistaken that the Hubei factory and another operating beverage belong to one subsidiary? But earlier, it was made known in post 1118 that "Sino Grandness sets up subsidiary to build and own new factory."

For those who are interested in exploring further on China VAT, here are more documents:
 
China: Country VAT / Business Tax Essentials Guide 2015 : kpmg
(Note: this was referred by portuser but did not provide relevent link)
https://www.kpmg.com/PL/pl/services/Fore...e-2015.pdf
 
Framework for VAT grouping for branches
Feb 2013 by kpmg
https://www.kpmg.com/CN/en/IssuesAndInsi...ouping.pdf
 
A look inside China’s VAT system
Understanding how the regime works to effectively manage VAT risks and opportunities
http://www.ccilc.pt/sites/default/files/...tem_en.pdf
 
Sourcing from China
Export VAT Refund
By Deloitte
http://www.deloitte.com.mx/csgmx/docs/So...rt_VAT.pdf
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Hi Young Investor,
 
In general, I agreed with “crubs” that answer to Question 2 is not clear cut. It could be a yes and no answer depending on……….
 
In specific, question 2 is not applicable to SG since it has no subsiadiary that owns more than one factory. For sure, there was no confusion on this.
 
One could have argued and accepted the high “VAT receivables“ in SG as being attributed to the “no grouping ruling” and moved on, or………………………
 
one could continue exploring by asking “in order to alleviate its problem of high VAT receivables, could SG’s subsidiarries/branches be better structured such that it would be in compliance with the VAT grouping ruling.”
 
And to do that, understanding of question 2 in relation to the relevant tax rules is critical…………………    

I am also looking at other companies on the same issue...............
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Hi Boon,

As you have mentioned Q2 can have Yes and No answer. It all depends on the setup/scenario.

By the way, out of curiosity and repeating Young Investor's question...were you mistaken that the Hubei factory and another operating beverage belong to one subsidiary?

cheers
Oldman9

Seriously, i can't identify the constructive discussions on-going about VAT. Unless Boon can show us that input VAT can be offset against output VAT for different entities.

Obviously, tax structures considerations not only pertains to current input VAT that can or cannot be utilised. There are different risk and business is different for each factory. Some do beverages, some do bottling, some do snacks etc. So using branches as a consideration, is good but not realistic. Unless we are operating in a simple environment where there are only a single local govt system you have to comply. You do understand that different cities in China have different requirements over the employee social contributions, tax requirements and incentives.