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UNDERSTANDING CHINA’S VAT

AND GOLDEN TAX SYSTEMS
AND HOW TO INTEGRATE THESE WITH ORACLE

A White Paper prepared by IT Convergence Consulting Services

Author
IT Convergence China Consulting Services

Copyright
IT Convergence 2008

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 UNDERSTANDING CHINA’S VAT AND GOLDEN TAX SYSTEMS AND HOW TO INTEGRATE THESE WITH ORACLE

TABLE OF CONTENTS

Overview ................................................................................................................................................................................... 3

VAT Practice in China ............................................................................................................................................................... 3

VAT Introduction ................................................................................................................................................................ 3

VAT Invoice and Printing ................................................................................................................................................... 4

VAT Registration................................................................................................................................................................ 4

VAT declaration ................................................................................................................................................................. 5

VAT Calculation and Payment ........................................................................................................................................... 5

The Golden Tax System ........................................................................................................................................................... 7

Golden Tax Introduction..................................................................................................................................................... 7

The process of application for Golden Tax System............................................................................................................ 7

Integration of the Golden Tax System and Oracle E-Business Suite ........................................................................................ 9

Lack of integration Prior to R12.......................................................................................................................................... 9

ORACLE Golden Tax Adaptor in R12.............................................................................................................................. 10

Oracle: An Effective Tool for Breaking Down the Barriers to Doing Business in China........................................................... 12

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 UNDERSTANDING CHINA’S VAT AND GOLDEN TAX SYSTEMS AND HOW TO INTEGRATE THESE WITH ORACLE

Overview

As one of the fastest growing countries, economies, and exporters, China’s economic boom is being closely followed by
business leaders, corporations, and consumers worldwide. Such rapid economic and demographic growth has made
China an optimal destination for outsourcing, especially among multinational corporations. However, despite the
opportunities that abound in China, successfully penetrating
this marketplace is not easy. In fact, the government’s
Considerations for Decision Makers changing, and often complex regulations can present
Foreign companies entering the Chinese market must multiple hurdles to foreign firms conducting business in
develop effective regulatory compliance strategies. China. One challenge that businesses must face relates to
This paper details how China’s Golden Tax and Value complying with local Value Added Taxation (VAT) laws.
Added Tax (VAT) systems work. It also sketches out an Recently, the government implemented the Golden Tax
Oracle solution for automating VAT-related processes. (GT) project, an integrated nationwide VAT monitoring
Below you will learn how: system that was launched in a bid to establish a
ƒ Oracle Release 12’s Golden Tax Adaptor (GTA) computerized taxation network to ensure corporate tax
provides user-friendly and easy to learn functionality. compliance. While the automatic, computerized system in
ƒ Oracle GTA automates VAT invoicing printing. some ways facilitates adhering to Golden Tax laws, foreign
ƒ Oracle GTA integrates with both Oracle Accounts corporations must be properly informed about the available
Receivable and the Hangtian Golden Tax System to tools that will allow them to integrate with China’s tax
facilitate each stage of Golden Tax compliance. collection and tracking systems.
ƒ Oracle Accounts Receivable serves as a VAT data
repository. Fortunately, Oracle Release 12´s (R12) Golden Tax adaptor
ƒ Oracle GTA eliminates customizations, automates is specifically designed to facilitate VAT compliance in
invoice splitting, and generates the invoice mapping China. This powerful business tool eliminates
reports that are required under Chinese law. customizations and supports VAT invoice issuing from
ƒ Oracle GTA reduces data entry errors and Accounts Receivable. Furthermore, the Golden Tax System
streamlines auditing through automation. and Oracle Accounts Receivable integrate seamlessly by
In addition, guidelines are also provided for those who exchanging data between the two systems using flat file
haven not upgraded to Oracle R12. (which are binary files) formats. Together, these user-
friendly, efficient applications ensure that a business fully
conforms to Chinese VAT rules. This white paper builds on
the overview presented in “Implementing Oracle Applications in China,”
China thoroughly outlines the intricacies of the VAT
and GT policies in mainland China, and will demonstrate how the Oracle E-Business Suite ensures accurate,
streamlined compliance.

VAT Practice in China

„ VAT INTRODUCTION

As the most important tax in China, the VAT is a circulation tax levied on the added value at each phase of a product’s
typical lifecycle. It exacts the deduction phase by phase so that the final tax is equal to the sum of the taxes on each
production phase.

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 UNDERSTANDING CHINA’S VAT AND GOLDEN TAX SYSTEMS AND HOW TO INTEGRATE THESE WITH ORACLE

While the basic rate of the VAT is 17%, certain goods are eligible for a lower rate of 13%. A zero rate or decreased rate
is sometimes applied to promote national economic development or to support the development of a specific industry or
group. Some examples of such initiatives that ultimately qualify for lower tax rates include environmental protection,
export promotion and foreign investment absorption.

The application of basic or additional rates depends upon the category of goods. Goods are generally levied according
to the basic rate which includes the labor service subject to taxation. Again, items eligible for a lower rate include living
necessities, cultural and educational articles such as books, and agricultural commodities such as grain, water, and
foodstuffs.

How to Calculate VAT

The value-added tax charged on goods sold or taxable services equals the amount remaining from the sales tax amount
of the current period after deducting the purchases tax amount from this period. To calculate this amount, use the
following formula:

Value-added Tax = Sales Tax Amount of Current Period - Purchases Tax Amount of Current Period

„ VAT INVOICE AND PRINTING

VAT invoices are issued by the seller to the buyer upon the sale of goods for the purpose of calculating the output VAT
payable and the input VAT creditable for the seller/ buyer. The collection of VAT is based on invoicing control, and VAT
invoices are the irreplaceable documents required for the crediting of input VAT.

China’s multiple regulations concerning VAT invoice printing include:

a) Only an ordinary VAT taxpayer can issue VAT invoices.

b) Eligible sales personnel must apply for permission to print VAT invoices.

c) VAT invoices can only be printed after approval by the GT System.

d) There is a limit to the maximum amount of money that can be printed on a single VAT invoice.

e) The format of the VAT invoice is fixed.

f) Four copies of the VAT invoice are issued.

„ VAT REGISTRATION

Companies must register in order to qualify as ordinary VAT taxpayers that can issue VAT invoices. The registration
procedures are based upon the following qualifications:

I. The company must submit a written application that includes the following documents:

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 UNDERSTANDING CHINA’S VAT AND GOLDEN TAX SYSTEMS AND HOW TO INTEGRATE THESE WITH ORACLE

g) Tax registration certificate

h) Business license

i) Certificates issued by the relevant financial bureaus held by the company’s finance department

j) Ownership or lease agreements on real estate for registered offices and places of production /operation

k) Relevant contracts (e.g. joint venture agreement) and Articles of Association

l) Evidence of opening of bank account for tax payment

m) Other relevant documents requested by the tax authorities

II. The tax authorities will then conduct a preliminary examination of the application report and relevant documents
submitted. On approval of the application, an Application Recognition Form of VAT General Taxpayer will be issued to
the company. The form will allow the organization to continue with the application process by providing the following
information:

a) Date of business commencement

b) Scope, mode and address of operations

c) Book-keeping conditions to assess the ability to accurately report on output and input tax figures

d) Organizational structure of Finance department

III. The enterprise has to complete the Application Recognition Form of VAT General Taxpayer and pass it on to the tax
authorities with the above documents for final examination.

„ VAT DECLARATION

Taxpayers and withholding agents must declare taxes and submit tax collection, tax withholding, payment reports and
tax returns before the deadlines set by the tax authority.

„ VAT CALCULATION AND PAYMENT

Any VAT paid on a vendor invoice is referred to as Input Tax. The VAT charged on a customer invoice is referred to as
Output Tax.

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 UNDERSTANDING CHINA’S VAT AND GOLDEN TAX SYSTEMS AND HOW TO INTEGRATE THESE WITH ORACLE

Input Tax

Input tax refers to the VAT amount paid or borne by the taxpayer for purchasing goods or receiving taxable services.

1. The Input tax can be offset from output under the following circumstances:

(1). When there is a VAT amount indicated on special VAT invoices received from the seller.

(2). When there is a VAT amount indicated on the “Duty Paid Certificate” provided by the Customs Authorities.

(3). When the Input tax is allowed to be offset for the purchase of tax-free agricultural products, wasted or used
materials as well as transportation fees.

The calculation formula for input tax is as follows:

Input tax = purchasing price (or transportation fee) × offset rate

(4). As approved by the State Council, starting on July 1st 1998, the offset rate for the transportation fee paid by VAT
taxpayers for purchasing or selling taxable goods was reduced from 10% to 7%. As to applications for input tax
offset that are made after July 1st 1998, the offset rate is 7%, regardless of whether the transportation invoice is
issued or whether the indicated transportation fee is actually paid.

Output Tax

Output tax refers to the VAT amount that is calculated with sales turnover and the VAT rate that is collected by
taxpayers from the buyers of goods or services when selling goods or providing taxable services.

1. Calculating Output Formula:

Output amount = sales turnover × VAT rate

2. Method for calculating sales turnover determining output tax: The sales turnover includes the actual selling price
and other related expenses received by taxpayers from buyers in the sales of goods or taxable services (not
including the output tax received from the buyers).

Tax Payable

Tax payable is the remaining sum of the current output tax less current input tax.

Calculation formula for tax payable:

Tax Payable = Current Output Tax – Current Input Tax

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If the current output tax is less than the current input tax, the difference can be transferred to the next taxation period for
credit. The time limits of VAT payment are respectively 1 day, 3 days, 5 days, 10 days, 15 days or 1 month. The specific
time limit for each taxpayer should be examined and determined by the tax authority on the basis of the actual tax
payable. Those who cannot pay the tax in accordance with the fixed time limits can make tax payments per transaction.

The Golden Tax System

„ GOLDEN TAX INTRODUCTION

Golden Tax is classified as a part of the Golden Projects, initiatives promoted by the Chinese government to modernize
the country's information technology infrastructure. As outlined in the overview, the Golden Tax project is a nationwide
value-added tax (VAT) monitoring system that consists of one network and four software systems. The mission of one
network is to build an integrated nationwide digital surveillance network that links national, regional and local security
agencies with a panoptic web of surveillance. The four software systems are VAT Cross-Check System, VAT Anti-
forgery Tax Control System, VAT Anti-forgery Tax Authentication System, and VAT Audit System.

Under this GT project, all businesses operating in China are required to use a government certified tax software referred
to as the GT software for generating VAT invoices, VAT calculation, and statutory tax reporting. Chinese government
policy requires all businesses to issue all VAT invoices through this GT System. Currently, the Aisino Corporation’s
Hangtian Golden Tax software is the only government-certified VAT collection and tracking software system available in
China.

„ THE PROCESS OF APPLICATION FOR GOLDEN TAX SYSTEM

Taxpayers should register with the tax authority following the appropriate legal procedures and hold valid taxation
registered certificates. Those that purchase the special VAT invoices should be deemed as the general VAT payers by
the tax authority and get authorization to use the GT System. The outline below details the application process.

I. Application for Purchasing Invoices and Printing Books

A. Taxpayers should receive both the application form for purchasing invoices and Printing Book (the book that
records VAT invoices) and the duplicates of the taxation registration certificate.

B. Taxpayers should fill out the application form and send it to the taxation office, along with the identification
information for the representative of the applicants. Both the application form and the identification information
must feature special invoice seals. The tax authority in charge will complete the verification procedure in ten
working days upon receiving the registration forms. Only applications that comply with related regulations will be
processed.

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 UNDERSTANDING CHINA’S VAT AND GOLDEN TAX SYSTEMS AND HOW TO INTEGRATE THESE WITH ORACLE

II. Application for Printing Invoices

A. Taxpayers should submit written applications for invoice printing to the tax authority.

B. Taxpayers should receive and then fill out the application form for printing the unified invoices which use the
same format for each province or city. They should include these unified invoices along with the Purchase
Invoices and Printing Book and identification of the representative of applicants. Additionally, two samples of the
invoices to be printed are needed. These sample invoices should include the following data:

1. Names of the units, trail numbers, sequence and functions of invoice folds, name of the clients, and the
number of the opening bank account.

2. Names, measurement, and number of commodities (or types of business), price per unit, the total value of
commodities (both in numbers and in Chinese characters), invoice issuer, invoice issuing date, stamps of the
unit (individual).

The above documents shall be examined by the tax authority in charge and only applications in accordance with
relevant regulations will be processed.

III. Verification of the limits of authority for invoice issuance

There are some limits when the company purchases invoices from the tax authority. These include limits for:

1. Maximum amount for each invoice

2. Total maximum invoice pages for each purchase

3. Total purchase times per year

4. Each release

IV. Verification and unified training organized by the municipal tax authority

After reviewing the application, the municipal tax authority will organize a training course to instruct companies to
successfully use the GT System.

V. Issuance of the Golden Tax card and Integrated Circuit (IC) card, installation and testing of the GT System

After the company is approved to use the GT System, the tax authority will give the applicant a GT card along with the
appropriate hardware and software to install the GT System. The GT card provides login instructions, and only after this
card is received can an organization begin to use the GT System.

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Integration of the Golden Tax System and Oracle E-Business Suite

The following discusses how the Oracle E-Business Suite integrates with the Golden Tax System.

„ LACK OF INTEGRATION PRIOR TO R12

Oracle E-Business Suite did not provide adequate integration with the GT System before Release 12. Prior to this
release, customizations were needed to provide the interface for the GT System.

The following details a pre-R12 solution for client customizations:

1. Set up Accounting:

According to the provisional regulations of the People’s Republic of China on VAT, the company needs to set up
special accounts to record VAT, and it also needs to set up these accounts in Oracle E-Business Suite’s Chart of
Accounts.

According to China’s accounting regulations, under the account title "Taxes payable," enterprises that open a
subsidiary must open a VAT payable account. Under the Vat Payable subsidiary account, special columns should be
set up which include: "Input tax," "Taxes paid," " Output tax," "Tax refund on export," and "Input tax transfer-out."

2. Setups for Tax Code:

The company needs to set up tax codes to determine the tax rate, and Oracle Receivables will accordingly calculate
the assigned rates.

3. Define transfer rule from Oracle Accounts Receivable to GT SYSTEM:

Not all AR invoices need to be transferred to the GT SYSTEM; transfer rules can be set up to define the filter criteria
for transferring Accounts Receivable invoices to the interface. Also there is a maximum limit for each invoice in the
GT SYSTEM. If one invoice amount is greater than the maximum amount limit, multiple invoices must be produced
that divide the total amount accordingly.

4. Customize program to transfer AR invoices to flat files or interface tables:

This customization requires technical consultants to develop a program that can transfer Oracle invoices into flat files
or interface tables according to the defined transfer rule outlined above.

5. Print VAT invoices in the GT SYSTEM:

After the VAT invoices are transferred to flat files or interfaces, the GT SYSTEM can then import these invoices and
print them.

6. Import VAT invoices additional information from GT SYSTEM

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Invoice numbers in Oracle’s system are different from VAT invoices in the GT SYSTEM. Therefore, the VAT invoice
numbers need to be imported along with other information (such as flags as to whether this invoice has been
imported into the GT SYSTEM) from the GT SYSTEM and transferred into Oracle’s system.

„ ORACLE GOLDEN TAX ADAPTOR IN R12

Oracle E-Business Suite’s R12 features a new application, the Tax Adaptor, which, as mentioned earlier, helps
customers create and issue VAT invoices according to Chinese legislation. The Oracle E-Business Suite integrates with
the Aisino GT SYSTEM, the leading provider of GT software in mainland China.

The diagram below illustrates an overview of the integrated solution between Oracle and the Hangtian GT SYSTEM

Data Transfer between Oracle’s E-Business Suite and the Hangtian GT SYSTEM

ƒ This feature is built on top of Oracle Accounts Receivable and Oracle E-Business Tax.

ƒ Tables are created which centrally hold the data from both Accounts Receivable and the Hangtian GT System.
Accounts Receivable data for invoices, debit memos and credit memos is transferred to this set of tables,
either by request or pre-defined periodic transfers.

ƒ A Workbench is provided to manage the data in the interface tables and make minor modifications, in the event
that they are necessary, before the data is exported to a flat file.

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ƒ Subsequently, data can be exported to the interface data into a flat file in a prescribed format that can later be
imported into the Hangtian GT System. All the required validations are done when the flat file is exported.

ƒ Afterwards, the flat file can be exported into the Hangtian System and generate the corresponding VAT
invoices to be issued to the customers.

ƒ The VAT invoice data can then be exported from Hangtian System into a flat file and then imported back into
the GT Adaptor. During this import, the VAT invoice data is updated according to the corresponding AR
invoices in the interface tables. Therefore, the GT Adaptor acts as a central repository of data from both
Accounts Receivable and the Hangtian GT System.

Major Features of the Oracle Golden Tax Adaptor:

ƒ The Oracle GT Adaptor supports Chinese VAT related Accounts Receivable invoices, debit and credit memos
(for both inventory and non-inventory items),

ƒ Transfer rules: Transfer rules help filter the Accounts Receivable documents while they transfer data from
Accounts Receivable to the Interface Tables. Companies can define specific rules, as outlined in the user’s
guide, which helps ease the process of transferring the desired invoices without affecting other users’ invoices.

ƒ Invoice splitting: The Chinese government sets limits on the maximum number of lines that are allowed on a
single VAT invoice, which vary for different customers in different provinces. This GT Adaptor feature supports
the splitting of Accounts Receivable invoices into multiple interface invoices and thereby multiple VAT invoices,
as per these limits.

ƒ Sales list invoices: A sales list is a document listing the detailed line items included in the invoice. The Chinese
government allows customers to issue a separate sales list along with the invoice, which is especially useful
when there are multiple items sold on a single VAT invoice. One example of such a case occurs when there is
no need to split the invoices as per the maximum lines limit. GT Adaptor supports this maximum line
requirement.

ƒ GT Invoice Workbench: This is the central user interface from where users can manage the entire interface
data for the following actions. This feature allows the user to:

- Edit the interface data if required, before exporting to the flat file

- Generate flat file

- Control invoice statuses.

ƒ Status control is provided to control the actions that are allowed on interface invoices to ensure data
consistency.

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ƒ Discrepancy and Invoice mapping reports are provided which help audit and reconcile the data between
Accounts Receivable and the GT SYSTEM. This eliminates the need to manually track and calculate
discrepancies.

ƒ Users can easily track VAT invoice(s) from Accounts Receivable invoices user interface and vice versa.

ƒ Customer and item master data can be exported from Oracle E-Business Suite to the GT System, which
eliminates manual data entry into both the systems.

ƒ Purging capability is provided to purge the obsolete data from interface tables to optimize data storage and
performance.

Implementing Oracle’s Golden Tax Adaptor will allow users to:

ƒ Simplify VAT invoice creation by automating the entry of VAT invoices into the GT System

ƒ Automate invoice splitting requirements, which eliminates the need to manually calculate, split and track
invoices

ƒ Reduce data entry errors caused by manual data entry and manually tracking the Accounts Receivable
invoices and their corresponding VAT invoices

ƒ Streamline reconciliation and auditing capabilities by providing readily available discrepancy data in tax
calculation, which helps users make the adjustment entries easily

ƒ Generate the required invoice mapping reports.

Oracle: An Effective Tool for Breaking Down the Barriers to Doing Business in China

While tax laws in China are complex, they are not barriers that should prevent a company from entering the market. As
this paper has demonstrated, tools such as Oracle’s GT Adaptor greatly facilitate compliance with tax laws. Compliance
with tax laws is of course only one of the many accounting-related requirements that foreign companies in China must
find innovative solutions for. Strategies for dealing with other accounting-related issues can be found in the white paper
“Bridging the GAAP: Solutions for Reconciling the Differences Between US and China GAAP” Although these
documents have been written to be as comprehensive as possible, there are many issues that will need to be resolved
on a case-by-case basis. Accordingly, the information outlined in these papers should be regarded as a starting point for
fiscal and tax-related solutions in China. Readers who are looking for more guidance on doing business in China are
welcome to contact IT Convergence at 1-415-675-7935 or 1-800-675-0032.

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LEGAL DISCLAIMER:

The information contained herein should be deemed reliable but not guaranteed. The author has made every attempt to provide current and
accurate information. If you have any comments or suggestions, please contact us: info@itconvergence.com.

IT Convergence White Paper: IT Convergence Worldwide Inquiries: www.itconvergence.com

Understanding China’s Vat and Golden 805 Veterans Blvd, Suite 216, Tel: 1 (415) 675-7935 Copyright © 2008
Tax Systems and How to Integrate Redwood City, CA 94063, USA Fax: 1 (650) 556-9739 IT Convergence.
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