Sino Grandness

[crubs]

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,

Indeed there must be a reason for Sino Grandness' corporate structure. What could the possible reasons be for Sino Grandness to have a structure that would prevent VAT offsetting ? Thanks

[Boon]

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.

Hi Alex,
 
It is definitely beyond me to show how input VAT could be offset against output VAT for different entities. Ha-ha!
 
True, I agree that taxation in China is quite a complex issue and the key is how to strike an appropriate balance between various different risks in the structuring of business entities.
 
Since you mentioned that “Obviously, tax structures considerations not only pertains to current input VAT that can or cannot be utilised.”
 
I am wondering how much of Sino Grandness reported “VAT receivables” could not actually be utilized.
 
I think we should let the moderator decide if we should continue debating on the VAT.
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[Boon]

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

Hi Oldman9,

"Sino Grandness sets up subsidiary to build and own new factory."
 
When I first read the above statement, I was thinking along the line of a business model whereby a new project company (subsidiary) is set up to manage, construct and own the new project during its development phase. Upon completion and successful commissioning of the project, ownership would be transferred to an operating subsidiary that owns the completed projects.
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[Young Investor]

Mr Boon

I do not see how the plain statement  "Sino Grandness sets up subsidiary to build and own new factory" can be interpreted as "a new project company (subsidiary) is set up to manage, construct and own the new project during its development phase. Upon completion and successful commissioning of the project, ownership would be transferred to an operating subsidiary that owns the completed projects."

Your motto is "research, research, and research". Can you share your research finding confirming that project company can transfer its input VAT to an operating subsidiary.

I did not want to write but your two following assertive statements caused me to change my mind:
"No, it is not over yet with VAT grouping." and "Be ready for more surprise on VAT grouping !" 

[Boon]

Mr Boon

I do not see how the plain statement  "Sino Grandness sets up subsidiary to build and own new factory" can be interpreted as "a new project company (subsidiary) is set up to manage, construct and own the new project during its development phase. Upon completion and successful commissioning of the project, ownership would be transferred to an operating subsidiary that owns the completed projects."

Your motto is "research, research, and research". Can you share your research finding confirming that project company can transfer its input VAT to an operating subsidiary.

I did not want to write but your two following assertive statements caused me to change my mind:
"No, it is not over yet with VAT grouping." and "Be ready for more surprise on VAT grouping !" 

Hi Young Investor,
 
Interesting comments there !
 
“Sino Grandness sets up subsidiary to build and own new factory”
 
B = Build
T = Transfer
O = Own
O = Operate
 
BTO, BOT, BOOT etc are some of the common business models in project delivery.
 
As you have described, it is a “plain” statement - without  “operate” being included, it could be interpreted as a BTO (Build, transfer, operate) project.
 
“Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.”
 
In another words, what I am saying is do not rely on my analysis, as it could be wrong.
 
Does the above statement convey to you a message that all my research is always right?
 
Does the above statement convey to you a message that I have done a research confirming that a project company can transfer its input VAT to an operating subsidiary?
 
On the other hand, have you done your research confirming that a project company cannot transfer its input VAT to an operating subsidiary?
 
If you have not, it means more research needs to be carried out – that why I have said "No, it is not over yet with VAT grouping."
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[Boon]

https://www.kpmg.com/PL/pl/services/Fore...e-2015.pdf

Page 22:

Can a Vat registered business claim a refund of input Vat/Gst paid where the input Vat/ Gst exceeds the output Vat/Gst payable or is
it obliged to carry the excess credit forward and set it against future output Vat/Gst payable?

VAT taxpayers are not generally eligible to claim a refund of excess VAT credits – instead, the excess VAT credit balance is carried forward (potentially indefinitely) and used to offset output VAT.

The only exception where refunds may be obtained is in respect of exports of goods, and exports of certain services such as international transportation, R&D and design services.
 
Page 23 :

• Excess VAT credits are not generally refundable – instead they are carried forward (without time limit) and used to offset output VAT. If the entity still has excess VAT credits when it is liquidated, those VAT credits will be lost.
  

 
To  me, this ruling is a big surprise.

Excess VAT credits could become a “permanent feature”of a company”

How relevant is this to Sino Grandness? Does it carry excess VAT credits that forever could not be utilized ?
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[Boon]

Hi Young Investor,
 
Coming back to your question:
 
Can a project company transfer its input VAT to an operating subsidiary?
 
Get the operating subsidiary to procure the plant and equipment. The project company just do the building structure. There will be no transfer of input VAT involved.

The problem wouldn’t even exist in the first place, if procurement is probably structured, IMO.
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[CityFarmer]

The discussion, is still focusing on company, than on person(s). Nothing to be moderated.

Generally, when a discussion met dead-lock, probably a good time to wrap it up, and agree to disagree. What do you all think?

Regards
Moderator

[portuser]

https://www.kpmg.com/PL/pl/services/Fore...e-2015.pdf

Page 22:

Can a Vat registered business claim a refund of input Vat/Gst paid where the input Vat/ Gst exceeds the output Vat/Gst payable or is
it obliged to carry the excess credit forward and set it against future output Vat/Gst payable?

VAT taxpayers are not generally eligible to claim a refund of excess VAT credits – instead, the excess VAT credit balance is carried forward (potentially indefinitely) and used to offset output VAT.

The only exception where refunds may be obtained is in respect of exports of goods, and exports of certain services such as international transportation, R&D and design services.
 
Page 23 :

• Excess VAT credits are not generally refundable – instead they are carried forward (without time limit) and used to offset output VAT. If the entity still has excess VAT credits when it is liquidated, those VAT credits will be lost.
  

 
To  me, this ruling is a big surprise.

Excess VAT credits could become a “permanent feature”of a company”

How relevant is this to Sino Grandness? Does it carry excess VAT credits that forever could not be utilized ?
_____________________________________________________________________________________________________________________________________________

Operating margin of Garden Fresh was 25% in 2014. As manpower cost is not taxable, output VAT should be more than 33%* higher than input VAT paid on operating costs.  
 
Generally, excess VAT credit does not arise.  

As VAT return is lodged monthly in China, excess VAT credit may arise in a month when substantial purchases are made. 

For export, input VAT may remain longer as processing of export tax refund takes time.


* For operating margin of 25%, revenue is 1.33 (= 1/[1-0.25]) times operating costs. 
 

[Young Investor]

Hi Young Investor,
 
Coming back to your question:
 
Can a project company transfer its input VAT to an operating subsidiary?
 
Get the operating subsidiary to procure the plant and equipment. The project company just do the building structure. There will be no transfer of input VAT involved.

The problem wouldn’t even exist in the first place, if procurement is probably structured, IMO.
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Sino Grandness has explained to shareholders before that local government will provide benefits (such as cheaper land, government grants) only if a local subsidiary is set up to pay local income tax on profits generated. 

Your suggestion will not work.