China VAT and e-commerce

June 2014

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PwC

Agenda

1. Why to watch China

2. E-commerce in China

3. Virtual Currencies

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Why to watch China?

We are here

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E-commerce and e-services in China

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E-commerce and e-services in China – VAT background

• In August 2013 China’s “VAT pilot program” was extended nationwide to the transportation and “modern services” industries.

• “Modern services”: the production, broadcast and publication of radio, films and television programs.

• From 1 June 2014 further extension for telecommunication services: the VAT rates of 11 percent and 6 percent for “basic telecoms services” and “value-added telecommunications services” respectively will replace the current 3 percent business tax.

• Mixed sales of “basic” and “value-added” services are not addressed in the legislation these to be accounted for separately; otherwise all of the VATable services will be subject to the highest VAT rate.

Practical implications: telecos may not be able to split smartphone charges between “basic” services such as voice calls and “value-added” services such as messaging and data services, as well as to issue invoices with different VAT rates.

• It is expected that these changes to the telecommunications sector would reduce profitability for the big three, state-owned enterprises that currently monopolize China's telecommunications sector.

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E-commerce and e-services in China

“In other countries, e-commerce is a way to shop, in China it is a lifestyle.”

Jack Ma – co-funder of Alibaba

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E-commerce and e-services in China

• By 2015, e-commerce transactions in China are estimated to reach USD 540 billion (cca. 10 percent of total retail transactions) …

• … and by 2020, China’s e-commerce market is estimated to exceed the US, Britain, Japan, Germany, and France combined. (source: chinamarketwatch.com)

• Alibaba is expected to IPO date in the US is 8 August 2014 – its gross merchandise value in 2013 (source: WSJ):

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Virtual Currencies

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The rise of virtual currencies

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The rise of virtual currencies A brief history in time

• Alipay (part of Alibaba), launched in 2004 with no transaction fees

• Biggest market share in China: 300M users & it controls approx. 50% of the Chinese online payment market * (* Credit Suisse – Feb. 2014)

• Provides an escrow service – payment only released to seller if the customer is happy with the goods purchased

“If the banks don’t change, we’ll change the banks.”

Jack Ma, co-founder of Alibaba

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The rise of virtual currencies The value of Bitcoin is the protocol

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The rise of virtual currencies Pro’s and con’s for companies

• No official VAT / tax treatment of virtual currencies in China

• Central Bank of China: “Bitcoin is not a currency” – Dec 2013

• The current approach discourages the use and the servicing of Bitcoin payments for 3rd party payment providers

• Key concerns of the Chinese government:

money-laundering,

capital controls,

lack of fundamental value,

extreme price swings.

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Acceptance of virtual currencies

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VAT specific related issues to Virtual currencies

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ebiz & ecommerce initiative

• http://ebiz.pwc.com/

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Contacts

Michaela Merz - Switzerland michaela.merz@ch.pwc.com +41 58 792 4429

Alan Wu - China alan.wu@cn.pwc.com +86 10 6533 2889

Thank you!

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