Ministry of Finance and State Administration of Taxation released a circular on July 31, 2012. According to this circulation, the Pilot Scheme for the VAT reform will be expanded to more cities in China’s mainland.  As per the schedule, Shenzhen will implement the reform from November 1, 2012. 

 

The pilot scheme consists of the following three parts, Implementation Measures on the Pilot Scheme on Switching from Business Tax to VAT (“Pilot Measures?, Regulations on Relevant Matters Concerning the Pilot Scheme on Switching from Business Tax to VAT (“Pilot Matters? and Regulations on the Transitional Policies Concerning the Pilot Scheme on Switching from Business Tax to VAT (“Pilot Transitional Policies?. The Pilot Measures set out the fundamental rules for the collection and payment of VAT in transportation and certain modern service industries in Shanghai. As a supplementary to the Pilot Measures, the Pilot Matters mainly deal with the applicable tax categories and the connection between policies in Shanghai and non-pilot areas, for pilot taxpayers and non-pilot taxpayers and for those who operate mixed business. And to balance the overall tax burden in the industries, the Pilot Transitional Policies clarify the transitional measures for the original preferential policies of business tax on the pilot taxpayers and the reduction and exemption measures for VAT under particular circumstances.

 

 

Under China’s current indirect tax system, VAT is levied on the supply of goods, the provision of repair, processing and replacement services, and on imports at the standard rates of 13% or 17%, while Business Tax (BT) is levied on the provision of other services and the transfer of intangibles and real property at rates of 3% or 5% (with a maximum 20% rate applying to the entertainment industry). The co-existence of the VAT and BT systems has led to a number of issues, such as double (or multiple) taxation because of the availability of an input tax credit for VAT payers with no such mechanism available under the BT system. The pilot program aims to resolve the double taxation issues under the prevailing system and to foster the development of specified modern service industries by gradually transitioning these industries from liability to BT to liability to VAT. The pilot program is considered a milestone for Chinese VAT reform and will have a significant impact on affected industries and companies in China.

 

 

The Pilot Measures stipulate that, the pilot taxable services include the compensable overland transport services (excluding railway transportation), water transport services, air transport services, pipeline transport services, research and development and technology transport services, information technology services, cultural and creative services, logistics  and supporting services, lease services of tangible movables, and verification and consulting services provided in the territory of China. Compared to the Implementing Rules on the Tentative Regulations on VAT and the Implementing Rules on the Tentative Regulations on Business Tax, the Pilot Measures further explicitly exclude the services provided in the following two non-business activities: (1) the collection of governmental funds or administrative fees by a non-enterprise-type entity to legally perform its public functions; (2) the transportation services and certain modern services provided by any enterprise or individual businesses to its employees.

 

Additionally, compared to the period when collecting and paying business tax, the Pilot Measures explicitly stipulate that, the taxable services provided by offshore enterprises or individuals to onshore enterprises or individuals which are entirely consumed offshore and the leases of tangible movables which are entirely used offshore, by offshore enterprises or individuals to onshore enterprises or individuals are not the pilot taxable services.

 

 

The Pilot Measures add two lower VAT rates. The tax rate applicable to transportation industries is 11% and the one to other modern services industries except for the lease services of tangible movables is 6% (the applicable tax rate for the lease services of tangible movables is 17%).

 

The regular taxpayer under the Pilot Measures refers to the taxpayer with an annual turnover of more than RMB 5,000,000. Those having a lower annual turnover are the small-scale taxpayers. Regular taxpayer shall follow the regular VAT calculation method and small-scale taxpayer shall follow simplified VAT calculation method.

 

When adopting the regular VAT calculation method, except for the amount indicated in special VAT invoice, the deductible input tax amount for transportation services shall be calculated according to the transportation fees indicated on transportation settlement document and the 7% deduction rate. The deductible input tax amount for the taxable services received from offshore enterprises or individuals shall be subject to the VAT amount indicated on the tax payment letter commonly-used for the relief of tax payment and obtained from tax authorities or onshore agencies. A series of documents, such as written contracts, payment proofs, shall be submitted for such deduction.

 

In addition, the Pilot Measures further stipulate that, the input tax amount incurred from the acceptance of passenger transportation services cannot be deducted from the output tax amount. The input tax amount incurred from self-used motorcycles, cars and boats which are subject to consumption tax and used as the transportation tools for transportation services and the subject of leasing services, is deductible.

 

When adopting the simplified VAT calculation method, the amount of payable tax shall be 3% of sale volume.

 

 

The pilot scheme explicitly points out that, if any pilot taxpayer operates mixed business, the highest tax rate shall apply. If any current regular taxpayer receives any taxable service from any pilot taxpayer, such input tax amount can be deducted to the extent as provided by the Pilot Measures. However, the transportation settlement documents issued after January 1, 2012 which any pilot taxpayer or any original regular VAT taxpayer obtains from the pilot areas (exclusive of railway transportation settlement document) cannot be considered as VAT deduction certificates. If a pilot taxpayer chooses the place where it is located as its tax location, the business tax it paid elsewhere is allowed to be deducted when calculating its payable VAT. Besides, the pilot scheme further clarifies the preferential policies that any pilot taxpayer may enjoy during the pilot period, including to allow the pilot taxpayer who provides technology transfer services, technology development services and the related technology consulting services and technology services to apply for an exemption of VAT upon relevant documents, to continue the original preferential policies of business tax, etc.

 

 

The implementation rules for VAT reform in Shenzhen include:

 

(1)       An enterprise who has completed VAT reform registration with the State Tax Bureau is required to apply for VAT ratification with the competent State Tax authority before November 2012.

 

(2)       Where the turnover of an enterprise exceeds RMB5 million during the period from October 1, 2011 to September 30, 2012, the enterprise is required to apply for General VAT Payer recognition with the competent State Tax authority before October 22, 2012.

 

(3)       An enterprise that has been recognized as General VAT Payer can apply for VAT control device with the competent State Tax authority starting from October 2012.

 

(4)      An enterprise that has registered tax preferential treatments with Shenzhen Local Tax bureau and the preferential treatment is still valid after October 31, 2012 is required to apply for ratification with the competent State Tax authority before October 31, 2012.

 

(5)       An enterprise that has completed VAT reform registration with the State Tax Bureau can apply for State Tax Invoice starting from October 2012. However, the State Tax invoice cannot be issued before November 1, 2012.

 

(6)      An enterprise that has completed VAT reform registration with the State Tax Bureau shall stop the use of Local Tax invoice from November 1, 2012.  The blank Local Tax invoice shall be verified and returned back to the Local Tax Bureau before November 30, 2012. 

 

(7)      An enterprise that has completed VAT reform registration with the State Tax Bureau shall start to file VAT tax return with the competent State Tax authority from December 1, 2012.

 

(8)     Shenzhen Local Tax Bureau has already announced a preliminary name list on VAT reform. For those enterprise that engage in transportation services and modern services but have not been included in the preliminary name list are required to apply for ratification with the competent Local Tax authority.

 

Kaizen is experienced in handling General VAT Payer qualification application and could assist your WFOE to handle the conversion from Business Tax to Value Added Tax. Should you have any questions regarding the information provided above or need any assistance, please feel free to contact us and talk to our professional tax consultants.

 

We will always keep you posted on the latest development by sending you notices or posting updates in our website. In this regard, please kindly browse the section related to the Pilot Scheme in website at the following web address the latest development:

 

 

Should you have any queries regarding above, please feel free to contact us.

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