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China to Implement Telecom VAT Trials on June 1

China Mobile, 4/30/14

China Mobile (NYSE: CHL; 0941.HK) has announced in a regulatory filing that that its parent company, China Mobile Communications Corporation, received a notification jointly issued by China's Ministry of Finance and State Administration of Taxation that, as approved by China's State Council, the telecommunications industry will be included in the scope of the pilot program for the transformation from business tax to value-added taxes. The pilot program will be implemented from June 1, 2014 in mainland China. For telecommunications enterprises, the value-added tax rate for the provision of basic telecommunications services will be 11%, and the value-added tax rate for the provision of value-added telecommunications services will be 6%. In addition, value-added tax policies in respect of, among others, the provision of rewards in connection with telecommunication services, the provision of telecommunications services to entities outside of mainland China, and redemption of accumulated points for telecommunication services are clarified.

As per China Mobile's statement, as value-added tax will be levied on revenue on the basis that taxes are separated from prices charged after the implementation of the VAT Program, operating revenue will decrease correspondingly. Further, as input tax deductions amount from value-added tax which the company can currently claim on its costs and capital expenditure are relatively low, for example, items including amortization and depreciation, personnel expenses and others are not deductible, operating expenses and capital expenditure will slightly decrease. Therefore, the relatively substantial negative impacts on profitability in the short term are expected. As the decrease in capital expenditure will reduce depreciation in subsequent years correspondingly, this will mitigate the negative impacts on profitability subsequently.

Editor's Note: For more background on this topic, please see "China May Postpone Telecom VAT Trials Until June" MD 4/03/14 issue.

Keywords: government policy China Mobile tax telecom Ministry of Finance State Administration of Taxation State Council CHL 0941.HK China Mobile Communications Corporation wireless

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