Expansion of the Value Added Tax (“VAT”) Reform and Further Clarified Rules on VAT Exemption
1. Expanded VAT Application Scope
1.1 VAT-able Service Scope
Following up with the VAT reform launched in 1 August 2013 nationwide, to further include more industries into the Business Tax (BT) to Value Added Tax (VAT) transformation pilot program (VAT pilot program), in year 2014, the Ministry of Finance and the State Administration of Taxation have jointly announced a series of circulars to promulgate that postal services, railway transportation as well as the telecommunication services are covered in the VAT pilot program.
- Postal Services
Postal services provided by the China Post Group are subject to VAT at 11% starting from 1 January 2014. Similar to other sectors under the current VAT program, certain postal services prescribed by the relevant measures are also eligible for VAT exemption, for instance, the postal service rendered for the goods export may be exempted from VAT.
- Railway Transportation Sector
Pursuant to the initially released VAT reform policy on transportation industry since year 2012, the railway transportation was excluded in the scope of reform. With coverage of railway transportation which is liable for 11% VAT rate effectively from 1 January 2014, the whole transportation industry is now under the pilot VAT program.
- Telecommunication Services
Subsequent to the postal service and transportation industry, as anticipated, effective from 1 June 2014, telecommunication services are also subject to VAT. Based on the new measures, there are two types of services applicable to the different VAT rate, e.g., 11% for basic services and 6% for value-added services).
The basic services refer to the activities for rendering voice communication services via telecommunication infrastructure such as fixed network, internet, etc., and the transfer of the right to use bandwidth, wavelength or network. The Value added services include supply of short message or multimedia message service via telecommunication infrastructure, the transmission and application of the digital data and information, access to internet, satellite television signal switch services.
While the telecommunication services rendered to overseas entities are exempted from VAT, it is uncertain whether the overseas service suppliers can be eligible for the same preferential VAT treatment.
1.2 Applicable Tax Rate
Currently, the industries covered in VAT reform and their applicable VAT rates for General VAT payers are as follows:
Apart from the above applicable VAT tax rate, there is also an assessable tax rate at 3% for small-scale taxpayers.
The minimum annual income to qualify for VAT General Taxpayer status is still set at RMB5 million under the newly added VAT industries.
2. VAT Exemption Qualification Criteria Further Clarified
In August 2014, State Administration of Taxation (SAT) issued Announcement No.49 (Announcement 49) to standardize and clarify the measures for claiming VAT exemption under the VAT pilot program. SAT Announcement 49 became effective from 1 October 2014 and superseded the old measures announced in 2013 (2014 measure).
As compared to the 2013 measures, with the expansion of industries included in the scope of VAT pilot arrangements, the following services have recently been included in the scope of cross-border services eligible for VAT exemption. Furthermore, the detailed contents and implementation requirements for these services are also set out in Announcement 49.
- Postal services provided for export goods
- Collection/delivery services provided for export goods
- Telecommunication services provided to overseas entities
2.1 Categories of VAT Exemption
We have tabulated the different categories of VAT exemption requirements below for your reference.
|Type of services||Industry||Exemption requirements|
|Exempt if services are|
provided to overseas
|Cultural and creative|
|Radio, film and|
|Research and development (R&D) andtechnical services|
|Exempt if the subject matter of the services takes place outside China||Postal services ·|
|Leasing of tangible|
|Cultural and creative|
|Radio, film and|
|Combination of the service recipient being overseas and the subject matter of the service not being sufficiently connected to China||Certification and|
|Energy management services (except where the object of the energy management contract is located in the PRC) provided to overseas entities|
|Unlicensed international transportation·|
2.2 Qualification for VAT Exemption Claim
With the issuance of a series of VAT rules to facilitate the implementation of VAT pilot program, the qualification criteria on VAT exemption as well as the filing procedures are further clarified. It is stipulated that all of the following yardsticks should be met to apply for VAT exemption.
- Enterprises conclude written cross-borders service contracts;
- For cross-border services rendered to the foreign recipients, enterprises receive the service proceeds from outside China; and
- Enterprises are required to separately account for the sales amount of cross-border services, compute the non-creditable input VAT for VAT-exempted sales revenue. Further, the special VAT invoices are not allowed to be issued for exempt sales activities.
In addition, Announcement 49 also stipulates the following key documents that are required for record filing purpose with the competent Chinese tax authority.
- Record filing form prescribed by the tax authority
- Original and photocopy of the cross border service contract
- Proof of provision of services outside China for services which are exempted if the subject matter of the services occurs outside China
- Proof of actual operations for international transportation services and transportation service to Hong Kong, Macau and Taiwan
- Proof that the service recipient is located overseas for services which are exempted if services are rendered to an overseas entity
- Any other documents required by the tax authorities
If any of the above documents are not written in Chinese, a translation should be provided with the signature of the supplier’s legal representative or official stamp affixed.
Such clarification should be welcomed by the taxpayers who intend to apply for VAT exemption since it provides the clear and standardized rules in terms of VAT exemption application and recognition process. Moreover, the scope of the VAT exemption has been expanded to include those associated with Postal and Telecommunication Services. It can be anticipated that as the scope of the VAT pilot program broadens further, expanded service would fall into the categories of VAT exemption.