VAT competition among China's provincial governments and the regulation suggestions

Abstract

Since the tax distribution reform implemented in 1994, China has begun general VAT system, and has determined the above as the tax categories shared by both the central government and the local governments. Whereas, “Base Number Technique” sharing is implemented for the VAT revenue between the central and local governments; that is to say, the VAT revenues turned over by the provincial governments are shared by the central and local governments as per the proportion of 75%–25%. The local governments have independent economic benefit, and have strong motivation to perform VAT system, and thereby the VAT revenue increases greatly; however, a new tax competition of VAT is put on the stage. The paper, in the first place, reviews the relevant theories of tax competition, then lists the cross-provincial VAT competition forms in China and analyzes the economic effects caused by VAT competition, and finally, as per the latest theories of the international tax revenue circle, raises some regulation suggestions on the VAT competition behaviors between the provincial governments.