VAT, GST and Sales Tax in China

Summary

Name of the tax Value-added tax (VAT)
Introduced 1-Jan-94
Trading bloc membership None
Administered by Ministry of Finance (MOF) State Administration of Taxation (SAT) (http://www.chinatax.gov.cn)
VAT rates
Standard 17%
Reduced 3%, 13%
Other Exempt and exempt with credit
VAT pilot (for details, read below article)
General VAT taxpayers 5%, 6%, 11%, 13%, 17%
Small-scale VAT taxpayers 3%, 5%
VAT number format XXXXXXXXXXXXXXXXXX (for entities established 1 October 2015 or later; 1-digit Registration Management Department code + 1-digit entity type code + 6-digit administrative division code + 9-digit organization code + 1-digit verification code), XXXXXXXXXXXXXXX (for entities registered before 1 October 2015; 6-digit administrative division code + 9-digit organization code)
VAT return periods Tax periods range from one day to one quarter
Thresholds
Registration Monthly turnover from CNY5,000 to CNY20,000 for supplies of goods, Monthly turnover from CNY5,000 to CNY20,000 for supplies of services, Daily turnover from CNY300 to CNY500 (the local tax offices set the actual thresholds within the above ranges; see article below)
Recovery of VAT by non-established businesses No

Scope of the tax

VAT applies to the following transactions:

  • The supply of goods or taxable services for consideration in China, by a taxable person in the course or furtherance of any business
  • The importation of goods into China, regardless of the status of the importer

A supply (sale) of goods is a transfer of ownership in the goods. The term “goods” includes electricity, heating, gas and other tangible assets. However, intangible property and real property are specifically excluded. (See below for VAT treatment of transactions with respect to intangible property and real property).

The following transactions are treated as supplies of goods:

  • Sales made through an agent
  • Sales of goods on consignment
  • The application or appropriation of goods by a taxable person for any of the following purposes:
    • VAT-exempt activities
    • Capital investment
    • Appropriation to shareholders or investors
    • Collective welfare or personal consumption
    • Making gifts

The place of supply for goods is where the goods are located at the time of the sale, or if the goods are transported, the place where the goods are dispatched.

A transfer of goods from one branch to another branch of the same taxable person for the purpose of sale is also treated as a supply of goods, regardless of whether any consideration is paid, unless the branches are located in the same county (municipality).

A self-supply of goods occurs if a taxable person diverts goods to private or exempt use and if the goods were manufactured or otherwise acquired by the taxable person and the person was entitled to an input VAT deduction (see Section F).

The aforementioned taxable services are the following two spe­cific types of services:

  • Processing services (see below)
  • Repair and replacement services (see below)

The term “processing services” means services supplied by a contractor for producing goods in accordance with a customer’s specifications by using raw materials and principal parts con­signed by the customer. The term “repair and replacement ser­vices” means repairing damaged taxable goods and returning them to their original condition. (See Section K for VAT treat­ment of other types of services.)

The place of supply for services is where the services are physi­cally performed.

Special rules apply to mixed transactions consisting of sales of taxable goods and supplies of taxable services. To ease tax admin­istration, mixed transactions carried on by enterprises and sole proprietorship businesses engaged in or mainly engaged in the production, wholesale and retail supply of goods are deemed to be supplies of goods. Other units and individuals that supply mixed transactions are regarded as providing taxable services.

In general, food and beverages supplied by catering businesses such as hotels, restaurants, cafes, public houses and caterers are treated as the provision of services rather than supplies of goods. However, if catering businesses supply takeaway food, the trans­action is treated as a supply of goods.

Who is liable

A taxable person is any “unit” or individual that sells goods or supplies processing or repair or replacement services in China unless the person’s sales are below the relevant taxable thresh­olds. VAT is also payable on the importation of goods. The term “unit” includes enterprises, administrative units, business units, military units and social organizations. This measure applies to persons that supply goods for export but does not include persons that exclusively produce VAT-exempt goods.

The State Council has stipulated a range of taxable thresholds for VAT registration. Local tax offices have the discretion to deter­mine the actual thresholds within these ranges, depending on the economic conditions within the relevant municipality or county. The following are the statutory taxable thresholds:

  • Sales of goods: monthly turnover of CNY5,000 to CNY20,000
  • Services: monthly turnover of CNY5,000 to CNY20,000
  • Daily transactions: daily turnover of CNY300 to CNY500

Registration procedures. The enterprise to be established on 1 October 2015 and afterward should apply to the administrative departments of industry and commerce for the business licenses with a unified social credit code, which could be used for tax affairs purposes.

Transactions between branches. Branches of the same enterprise are required to register separately for VAT, unless the head office and the branch(es) are located in the same county (municipality). However, subject to the approval of the tax authorities, the head office of an enterprise may be allowed to submit combined VAT returns for branches located in different counties (municipalities).

Transactions between branches may be subject to VAT, unless the relevant branches are located in the same county (municipality). A movement of goods between branches located in different counties (municipalities) is subject to VAT regardless of whether any consideration is paid. A distinction is made between a move­ment of goods to a branch for the purpose of sale to customers and movement of goods to a branch for storage. By default, a move­ment of goods from one branch to another is deemed to be for the purpose of sale to customers unless the enterprise can prove that it fulfills both of the following conditions to the satisfaction of the tax authorities:

  • The branch that receives the goods will not sell the goods to customers on its own account, issue the relevant invoices or collect sales proceeds from the customers.
  • The enterprise has obtained a special permit from its supervis­ing tax authority that allows it to keep inventory outside the place where it is established.

If both of these conditions are fulfilled, the goods may be regard­ed as being moved to a branch for pure storage purposes and the transaction is not liable to VAT.

Government bodies. State and local authorities including admin­istration units, business units, military units, social organizations and other government units are treated as taxable persons for the purpose of VAT.

Group registration. Group registration (or fiscal unity) for VAT purposes is not a recognized concept in the Chinese VAT regula­tions. Individual group members are regarded as independent VAT taxpayers.

Non-established businesses and foreign enterprises. Subsidiaries of foreign enterprises that supply goods or taxable services in China are treated in the same manner as other taxable persons.

Foreign enterprises that do not sell goods or taxable services in China may not register for VAT. Under the current business regu­latory rules, foreign enterprises are generally not allowed to sell goods or provide processing or render repair and replacement services directly in China. Consequently, VAT registration and the payment of VAT are not issues for non-established businesses.

If a foreign unit or individual outside China provides taxable services in China and does not have a business office in China, the representative of such unit or individual must be the with­holding agent. If such unit or individual does not have a represen­tative, the purchaser must be the withholding agent.

Representative offices. Under the current business regulatory rules, a representative office of a foreign enterprise may engage only in certain activities, such as liaison and support. A represen­tative office may not engage in direct profit-making activities, and it is prohibited from making sales of goods. Consequently, in general, VAT is not payable with respect to the activities of a representative office and VAT registration is not permitted.

Any person who imports goods into China is liable to pay VAT at the point of entry, at the same rates applicable to the sale of similar goods in China. A taxable person must pay the VAT due on imported goods within 15 days after the date following the date on which the customs authorities issued the import duties statement.

Reverse charge. Not applicable.

Digital economy. Until 31 December 2016, cross-border e-com­merce (export services) in the Hangzhou pilot area is exempt from VAT.

On 12 January 2016, the Chinese Government announced the extension of this pilot in 12 more cities: Tianjin, Shanghai, Chongqing, Hefei, Zhengzhou, Guangzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen and Suzhou.

The imported commodities retailed through the cross-border e-commerce shall, according to the types of goods, be subject to import VAT. Individuals purchasing any imported goods retailed through cross-border e-commerce shall be taxpayers; the actual transaction prices shall be a dutiable price; and e-commerce cor­porations, corporations specialized in e-commercial transaction platform or logistic enterprises can be the withholding party for VAT.

Deregistration. Where a taxpayer’s obligation to pay tax is termi­nated in accordance with the law due to dissolution, bankruptcy, cancellation or other reasons, the taxpayer shall provide the rel­evant certificates or materials and go through the formalities for tax deregistration with the tax authorities that handled its original tax registration (“original tax authorities”) before it proceeds to deregister with the industry and commerce administrative author­ities and other relevant bodies.

As for taxpayers who do not need a deregistration with the indus­try and commerce administrative authorities and other relevant bodies, it shall, within 15 days after obtaining relevant approval or termination announcement, provide the relevant certificates or materials and go through the formalities for tax deregistration with its original tax authorities.

Where a taxpayer’s business registration is revoked by the indus­try and commerce administrative authorities, or when the regis­tration is cancelled by other relevant authorities, the taxpayer shall go through the formalities for tax deregistration with its original tax authorities within 15 days after the business registra­tion has been revoked or cancelled.

Where a change of tax registration authorities is required for a taxpayer due to a change in its domicile or business place, the taxpayer shall provide the relevant certificates or materials and go through the formalities for tax deregistration with its original tax authorities before it proceeds to modify registration or deregister with the industry and commerce administrative authorities and other relevant bodies, or to change its domicile or business place. It is also required to apply for tax registration with the tax author­ities at the new location within 30 days after the tax deregistration.

Where a foreign enterprise is engaged in construction, installa­tion, assembling or exploration, or provides services in China, it shall provide the relevant certificates or materials and go through the formalities for tax deregistration with its original tax authori­ties after the project is completed and no less than 15 days before its departure from China.

VAT rates

Before the VAT pilot, the positive VAT rates in China are 3%, 13% and 17%. The 17% rate applies unless another rate is speci­fied by law. The reduced rate of 13% applies primarily to essen­tial goods and services. The 3% rate applies to supplies under simplified VAT calculation methods or supplies by small-scale VAT taxpayers (small businesses). (See Section K for other VAT pilot information.)

The following lists provide some examples of goods and services taxable at each rate.

Examples of goods and services taxed at the 3% rate

  • Taxable goods and services supplied by small businesses
  • Certain taxable used goods
  • Consignment goods sold by consignment agencies
  • Certain goods sold by pawnbrokers
  • Specific duty-free items sold by duty-free shops
  • Certain electricity produced by qualified hydroelectric-generat­ing businesses
  • Certain construction materials
  • Certain biological products
  • Tap water (rate applies if taxpayer chooses simplified computa­tion method with no input tax recovery)
  • Certain concrete cement goods sold by general VAT taxpayers

Examples of goods and services taxed at the 13% rate

  • Foodstuffs
  • Edible plant oil
  • Tap water (rate applies if taxpayer chooses regular VAT compu­tation and recovers input tax)
  • Air-conditioning
  • Hot water
  • Coal gas
  • Liquefied petroleum gas
  • Natural gas, biogas and coal products for civilian use
  • Books, newspapers and magazines
  • Animal feeds
  • Fertilizers
  • Agricultural chemicals
  • Agricultural machinery
  • Agricultural protection covers
  • Agricultural products subject to minor processing
  • Audio and video products
  • Electronic publications
  • Dimethyl ether

A taxable person that supplies goods or taxable services with different VAT rates must separately book the value of sales of goods and taxable services at each rate. The highest rate of VAT applies if the sales made at different rates are not accounted for separately.

Flat rate. “Small businesses” account for VAT at a rate of 3% on a simplified, flat-rate basis if input VAT paid on purchases is not deductible. A “small business” is defined as either of the following:

  • A production business that manufactures taxable goods or pro­vides processing or repair and replacement services (taxable services) and that has annual turnover (including sales for export) of CNY500,000 or less
  • A commercial business that supplies taxable goods on a whole­sale or a retail basis and that has annual turnover (including sales for export) of CNY800,000 or less

On approval by the local tax authorities, a small business may elect to pay VAT in accordance with the relevant provisions appli­cable to a general taxable person if it can demonstrate that it has a sound accounting system, maintains proper accounting records, and is capable of generating accurate information for VAT assess­ment purposes.

Exempt supplies. In general, exports of goods are “exempt with credit” (or taxable at 0%). This means that no VAT applies but the exporter may recover VAT paid as input tax. In addition, some supplies are exempt from VAT without credit; that is, the supplies are not liable to tax, but the supplier may not recover VAT as input tax (see Section F).

Examples of exempt supplies of goods and services

  • Agricultural products produced and sold by primary agricul­tural producers
  • Contraceptive medicines and appliances
  • Antique books
  • Imported equipment and apparatus used directly for scientific education, scientific research, development and experiments
  • Imported products and equipment in the form of free economic assistance from foreign governments and international organi­zations
  • Products imported by organizations for the handicapped for their exclusive use
  • Sale of secondhand goods by nontaxable individuals

Currently, animal feeds, agricultural protection covers, the pro­duction of some specific types of chemical fertilizers, the trading of seeds, seedlings, chemical fertilizers, agricultural medicines, farming machinery, and the sale of self-manufacturing qualifying reclaimed water, certain rubber powder and refurbished tires, and qualifying sewage treatments are also exempted from VAT by virtue of administrative measures adopted by the Chinese tax authorities to protect farming businesses and encourage recy­cling in China.

To support the development of small businesses, those entities with a monthly sales amount or turnover of CNY30,000 or less may be exempted from VAT. For small-scale VAT taxpayers who are eligible for quarterly VAT filing, their quarterly sales or turn­over could be exempted from VAT if the amount is not more than CNY90,000.

Option to tax for exempt supplies. Taxpayers who could be eligi­ble for VAT exemption may choose to give up the right of VAT exemption and pay VAT. Once the choice is made, the taxpayer cannot switch back to applying for VAT exemption within 36 months.

Examples of goods and services taxable at 0%

  • Exports of goods (excluding prohibited or restricted exports)

Taxable persons that supply items eligible for tax exemption or tax reduction must book these sales separately. Otherwise, no tax exemption or reduction applies.

Special rules apply to sales of used fixed assets.

Time of supply

The “time of supply” is the time when VAT becomes due (that is, the tax-triggering point).

Goods. The following are the principal aspects of the time of sup­ply rules for goods:

  • If the sales proceeds are received directly from the buyer, the time of supply is when payment is received or when an invoice is issued, whichever is earlier, regardless of whether the goods have been delivered.
  • If the sales proceeds are collected through a bank, the time of supply is when the goods are dispatched.
  • If payments are made by installments in accordance with a sales and purchase agreement, the time of supply is when each install­ment is due. In the absence of a written contract or specification of the date of collection in the contract, the tax point is the date on which the goods are dispatched.
  • If payment is made in advance, the time of supply is when the goods are dispatched. For large-scale machines and equipment, ships, aircraft and other goods whose production period exceeds 12 months, the time of supply is the date on which the advance payment is received or the date of collection specified in the written contract.
  • For supplies of goods made through a consignment agent, the VAT payable by the consignor is due when the consignor receives the sales confirmation list or the payment from the consignment agent, whichever is earlier. However, if the con­signor receives neither the sales confirmation list nor the payment from the consignee within 180 days from the date of dispatching goods, the goods are regarded as having been sup­plied to the consignee and VAT will be payable accordingly.

Taxable services. The time of supply for the provision of taxable services is when the payment for the service is received or when an invoice is issued, whichever is earlier.

Imports. VAT is payable for imported goods when the goods are declared to Customs.

Recovery of VAT by taxable persons

A taxable person may recover input tax, which is VAT charged on goods and services supplied to it for business purposes. A taxable person generally recovers input tax by crediting it against output tax, which is VAT charged on supplies made. However, input VAT credit is not allowed for small businesses that are subject to VAT at a flat rate (see Section D). Input tax includes VAT paid by a taxable person on the acquisition and importation of taxable goods and services that are acquired for the purposes of the tax­able person’s business activities. No credit is permitted with respect to purchases made for other purposes. To claim input VAT credits, a taxable person must comply with the following conditions:

  • It must be registered with the tax authorities as a general VAT taxpayer (not as a small business).
  • It must maintain a reliable accounting system and provide accu­rate information for assessing its VAT liabilities.
  • It must hold a valid VAT invoice obtained from the vendor (see Section H), a tax certificate issued by the customs authorities or other valid supporting documents including transportation invoices and agricultural product procurement certificates.

A taxable person may recover input VAT as soon as it has a valid VAT invoice or a tax certificate issued by the customs authorities or other valid supporting documents. It is not necessary to wait until the purchaser has paid for the goods or the supplier has paid the output VAT to the tax authorities. The claim for input VAT credit must be made in the VAT return for the period in which the invoice or other documents are validated by the tax authorities. A taxable person must submit all input VAT invoices and other documents to the tax authorities for verification within 180 days after the date of issuance of the documents.

Imputed credits. In calculating its net VAT payable, a taxable person may also claim an imputed credit equal to 13% of the purchase value of VAT-exempt agricultural products purchased from primary agricultural producers or agricultural cooperative societies.

Non-deductible input tax. Input VAT is not creditable on the acquisition or importation of the following items:

  • The purchase of taxable goods or services used in VAT-exempt activities, except for fixed assets put into use for both taxable and VAT-exempt activities
  • The purchase of taxable goods or services used in activities subject to VAT on a simplified basis
  • The purchase of taxable goods or services for collective welfare or personal consumption
  • The “abnormal loss” of purchased taxable goods and associated taxable services
  • The abnormal wastage of purchased taxable goods or services consumed in the production of merchandise or finished products
  • Consumer goods for self-consumption of taxable persons that are specified by the competent authorities for financial and taxation affairs under the State Council
  • Transportation expenses for goods specified in the above items and for the sales of VAT-exempt goods

“Abnormal losses” include losses resulting from a range of events including theft, decay or deterioration of goods as a result of poor management, but excluding normal wear and tear sustained in the ordinary course of the taxable person’s business.

Export refund. A taxable person that supplies goods for export must register with the relevant local authorities responsible for overseeing foreign trade to obtain an approved Foreign Trade Operator Registration Form. It can use this form to complete a registration with the relevant tax authorities and confirm its entitlement to export refund.

With the exception of certain types of goods, exports of goods are generally exempt with credit; that is, input VAT previously paid on the purchase of goods and services used for the produc­tion of goods for export is refunded on application. This proce­dure is commonly known as the “VAT export refund.” However, the VAT exemption with credit mechanism does not apply to certain types of goods. For those goods whose VAT export refund rates are less than the applicable VAT rates for normal supply, the taxable person must bear the difference as a cost, even though the goods are sold for export. Such VAT cost is commonly referred to as an “export VAT leakage” or “input VAT disallowance.”

Depending on the type of exporting enterprise, the VAT export refund and the input VAT disallowance are calculated based on the different methods described below.

Manufacturing enterprises (assuming no tax-exempt raw materials). For companies engaging in the production of taxable goods, the following are the calculations of the input VAT disallowance and the relevant creditable input VAT.

Calculation of input VAT disallowance (Calculation #1) Input VAT disallowance = Free on Board (FOB) value of export sales x (Applicable VAT rate – VAT export refund rate)

Calculation of creditable input VAT (Calculation #2)
Creditable input VAT = Total input VAT – Input VAT
disallowance (as determined in Calculation #1) + Excess
input VAT brought forward from previous period

The taxable person must compute VAT payable for each reporting period by using the following calculation.

Calculation of VAT payable (Calculation #3)
VAT payable = Output VAT due on sales for the period – Creditable input VAT (as determined in Calculation #2)

If the amount of creditable input tax in a period is greater than the output VAT due on sales in that period (that is, Calculation #3 results in a negative balance), the taxable person is entitled to a VAT export refund.

The VAT export refund is equal to the lesser of the following amounts:

  • FOB value of export sales x VAT export refund rate
  • The absolute value of Calculation #3 if the calculation results in a negative balance

Commercial enterprises. For a taxable person carrying on a com­mercial business that involves the purchase of taxable goods in China for export, the following are the calculations of the VAT export refund and the input VAT disallowance:

VAT export refund = Price paid for the purchase of
taxable goods x Applicable VAT export refund rate

As a result, the taxable person bears an input VAT disallowance that goes into its cost. This disallowance is determined in the fol­lowing calculation:

Input VAT disallowance = Price paid for the purchase of
taxable goods x (Applicable VAT rate – VAT export refund rate)

Application and declaration. Eligible enterprises or other entities may file a tax refund (exemption) application. After approval, enterprises or other entities shall make the declaration on VAT refund (exemption) and exemption with the competent authority within the declaration period of VAT payment.

For the goods exported through an agent, the entrusting party shall be responsible for declaring VAT refund (exemption). For the water, electricity and gas supplied to the special areas, the manufacturing enterprises within the special areas, as the pur­chasers, shall be responsible for declaring the tax refund.

Partial exemption. Taxable persons that make taxable supplies and other supplies (such as exempt supplies and outside the scope supplies) are only entitled to claim input VAT incurred in making their taxable supplies as credits. Input tax is not creditable for any purchases that are directly related to making exempt supplies.

If a taxable person has purchases or imports that are used to make both taxable and exempt or outside the scope supplies, an appor­tionment of input VAT is allowed. The allowable input VAT credit is generally calculated using the ratio of turnover from taxable supplies compared with the total turnover of that month from all supplies.

Refunds. Upon discovering that a taxpayer has paid an amount in excess of the tax payable, the tax authorities shall immediately refund the excess amount to the taxpayer.

When a taxpayer discovers that it has paid in excess of the tax payable within three years from the date the tax payment was made, it may claim from the tax authorities a refund of the excess amount and interest based on bank deposit for the same period.

Upon examination and verification, the tax authorities shall immediately make the refund. If the refund involves returns from the State Treasury, the refund shall be given according to the provisions of laws and administrative regulations relating to the administration of State Treasury.

Preregistration costs. No input VAT recovery is possible for costs and purchases made prior to registration.

Recovery of VAT by non-established businesses

China does not refund VAT to businesses that are not established there.

Invoicing

VAT invoices and credit notes. A general VAT taxpayer must reg­ister and procure approved VAT invoices from the tax authorities. The taxable person must also designate and register an individual employee as a representative who is responsible for administer­ing the custody and control of VAT invoices. A valid VAT invoice is needed to support any claim for input VAT recovery (see Section F).

A special VAT invoice may only be issued for supplies of taxable goods or services made to taxable recipients. A special VAT invoice must contain the following information:

  • The supplier’s VAT registration number
  • The purchaser’s VAT registration number
  • The date of issuance of the invoice
  • The name, address and telephone number of the taxable person supplying the taxable goods or services
  • The name, address and telephone number of the taxable person purchasing the taxable goods and services
  • The bank account numbers of the supplier and the purchaser
  • A full description of the taxable goods or services supplied
  • The quantity or volume of goods supplied
  • The consideration (exclusive of VAT)
  • The rate or rates of VAT and the amount of tax chargeable at each rate

The supplier may not issue a special VAT invoice for the follow­ing:

  • The supply of goods (such as cigarettes, alcohol, foods, gar­ments, shoes, hats and cosmetics) to ultimate consumers by VAT taxpayers that engage in retail sales.
  • The sale of VAT-exempt goods unless otherwise stipulated by specific rules or regulations.
  • The supply of taxable goods or services by small-scale taxpay­ers. However, small-scale taxpayers can apply to the relevant tax authority to issue VAT invoices on their behalf for supplies of taxable goods or services.

Red-letter invoice (credit note). If goods are returned after an invoice has been issued, a red-letter invoice must be issued. The original invoice must be returned and “invalid” written clearly on it, or a notification must be obtained from the other party.

If sales discount is given after an invoice has been issued, the original invoice must be returned and “invalid” written clearly on it before re-issuing a new invoice, or a red-letter invoice shall be issued after a notification is obtained from the other party.

Foreign-currency invoices. VAT invoices are issued and printed through the Golden Tax System (GTS) – a tax control system connected to the database of the tax authorities. VAT invoices in China must be issued in CNY. Where a taxpayer settles the sales amount in any currency other than CNY, the average CNY exchange rate on the date the sales amount occurs or on the first day of the current month may be used at the discretion of the taxpayer. The taxpayer shall decide in advance on a conversion rate and may not change it within 12 months once such a conver­sion rate is determined.

Electronic invoices. The State Administration of Taxation started a pilot on 1 August 2015 for the issuance of electronic invoices through the upgraded VAT invoicing system in Zhejiang Province, the municipalities of Beijing and Shanghai, and the city of Shenzhen. And the electronic invoice pilot has been expanded to the whole nation since 1 December 2015. At present, such elec­tronic invoices are only applicable to the general VAT invoices in China.

Proof of export. For manufacturing enterprises the requirements include:

  • Declaration forms required by tax authority for exemption, deduction or refund of tax on exported goods
  • Foreign exchange declaration for the export of goods (copy for export refund)
  • Export invoice
  • For goods exported on assignment, verification issued by the assignee for the export of the goods and a photocopy of the export agency agreement

For foreign trade enterprises the requirements include:

  • Declaration forms required by tax authority for exemption, deduction or refund of tax on exported goods
  • Foreign exchange declaration for the export of goods
  • VAT invoice (credit copy), declaration by batch form for imported goods with export refund, tax payment certificate for imported goods
  • For goods exported on assignment, verification certificates issued by assignee’s in charge tax authorities for the export of goods on assignment and a photocopy of the export agency agreement
  • For items subject to consumption tax, consumption tax payment certificate, consumption tax payment certificate for imported goods

VAT returns and payment

VAT returns. In China, VAT tax periods vary in length. A VAT tax period may be 1 day, 3 days, 5 days, 10 days, 15 days, 1 month or 1 quarter. The length of the tax period is determined by the local tax authorities, based on the amount of VAT payable by the tax­payer. If VAT payments cannot be made on a fixed-period basis, VAT may be paid on a transaction basis.

Taxable persons that have a VAT tax period of 1 month or 1 quar­ter must submit VAT returns and pay the VAT due on a monthly or quarterly basis within 15 days after the end of the period. Taxpayers that have a VAT tax period shorter than one month must make provisional VAT payments within five days after the end of the tax period. They must also submit a VAT return and settle the VAT payable for the previous month by the 15th day of the following month.

Special schemes. Not applicable.

Electronic filing and archiving. Electronic filing (e-filing) is rec­ommended by tax authorities in China. Taxpayers can log in to the tax declaration website with a U-key and file the electronic VAT tax return with the relevant appendix. When e-filing is unsuccessful or encounters any difficulties, paper filing is acceptable.

The accounting books, accounting vouchers, statements, receipts of tax payments, invoices, vouchers for exportation and other tax-related materials shall be kept for 10 years unless otherwise specified in the laws and administrative regulations.

Annual returns. Not applicable.

Penalties

Authorized tax officers have extensive powers relating to the inspection and seizure of records. If a tax officer is of the opinion that a taxable person has underpaid the VAT due, the officer may issue an assessment based on the correct figures or on an esti­mate.

Where a taxpayer underpays or fails to pay taxes within the time limit prescribed in provisions, or a withholding agent under-remits or fails to remit taxes within the time limit prescribed in provisions, the tax authorities shall, in addition to ordering the taxpayer or withholding agent to pay or remit the taxes within a prescribed time limit, impose a fine on a daily basis at the rate of 0.05% of the amount of tax in arrears, commencing on the day the tax payment was defaulted.

If the taxpayer or withholding agent fails to pay the tax within the new time limit, the tax authorities may impose a fine of not less than 50% and not more than 500% of the amount of tax in arrears.

If a withholding agent fails to withhold or levy an amount of tax that should have been withheld or levied, the tax authorities shall seek the payment of the tax from the taxpayer and concurrently impose on the withholding agent a fine of not less than 50% and not more than 300% of the amount of tax that should have been withheld or levied.

Special schemes. In general, sales of secondhand taxable goods by taxable persons are chargeable to VAT on a simplified basis at a rate of 3% with a further reduction to 2%.

Sales of secondhand taxable goods by nontaxable individuals are exempt from VAT.

Special rules apply to sales of used fixed assets.

VAT pilot

On 16 November 2011, the Chinese Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly issued Caishui [2011] No. 110 and Caishui [2011] No. 111, which set out the details of the Shanghai VAT pilot, which was to be a sig­nificant step towards the planned wider, structural VAT reform.

The VAT pilot started in Shanghai on 1 January 2012. On 25 July 2012, Chinese premier Wen Jiabao announced at the State Council Standing Committee meeting that the VAT pilot would be expanded to cover eight additional locations. The announce­ment also mentioned that in 2013 the VAT pilot would expand further and that certain industries would be selected to be includ­ed in the VAT pilot on a nationwide basis. Shortly afterward, the MOF and SAT jointly issued Caishui [2012] No. 71, which unveiled the anticipated expansion to Beijing as well as the plans for VAT pilot expansion for the rest of 2012.

On 24 May 2013, the MOF and SAT jointly released Caishui [2013] No. 37 to announce the launch of VAT pilot arrangements on a national basis from 1 August 2013.

With effect from 1 August 2013, transportation services (exclud­ing railway transport) and selected modern services that have already been included in the current VAT pilot arrangements are subject to VAT on a nationwide basis. The scope of the selected modern services included in the 1 August 2013 nationwide VAT pilot expansion is similar to that of the initial VAT pilot (R&D and technology services, information technology services, cul­tural and creative services, logistics auxiliary services, moveable property leasing and authentication and consulting services). With effect from 1 August 2013, the scope of selected modern services has been expanded to include the production, broadcast­ing and distribution of radio, television and movie products.

VAT pilot expansion has been further set out in Caishui [2013] No. 106 (Circular 106) issued by the Chinese Ministry of Finance (MOF) and the State Administration of Taxation (SAT) on 12 December 2013.

Circular 106 covers two additional VAT pilot service sectors, railway transportation and postal services, and also integrates a number of significant changes to the VAT pilot rules aiming to introduce enhancements to some of the VAT pilot areas such as finance leasing and international freight forwarding where strong feedbacks have been received from taxpayers.

On 30 April 2014, the MOF and SAT jointly released Caishui [2014] No. 43 to include the telecommunications industry into VAT pilot scope with an effective date of 1 June 2014.

On 24 March 2016, the MOF and SAT jointly released Caishui [2016] No. 36 (Circular 36), which expands the VAT pilot scope to the remaining four sectors of finance, construction and install­ment, real estate, and lifestyle services. After that, a succession of circulars were released to set out the detailed implementation rules.

Scope of the VAT pilot. The following lists show the services that were subject to Business Tax (BT) but are now subject to VAT (VAT pilot services).

  • Sales of services
  • Sales of intangible assets
  • Sales of immovable properties

Sales of services would include the following:

Transportation industries

  • Land transportation including railway transportation
  • Water transportation
  • Air transportation
  • Pipeline transportation

Postal services

  • Universal postal service
  • Special postal service
  • Other postal service

Telecommunications services

  • Basic telecommunications services
  • Value-added telecommunications services

Construction services

  • Engineering services
  • Installation services
  • Renovation services
  • Decoration services
  • Other construction services

Financial services

  • Loan services
  • Direct financial services
  • Insurance services
  • Financial product trading

Modern services

Research and development (R&D) and technology services

  • R&D services
  • Professional technology services
  • Contract energy management services
  • Engineering reconnaissance and exploration services

Information and technology services

  • Software services
  • Circuit design and testing services
  • Information system services
  • Business process management services
  • Value-added information system services

Culture and creative services

  • Design services
  • Intellectual property services
  • Advertising services
  • Conferencing and exhibition services

Logistics supporting services

  • Aviation services
  • Port services
  • Freight and passenger station services
  • Salvage assistance services
  • Storage services
  • Collection and delivery services
  • Loading-unloading transportation services

Leasing services

  • Operating leasing
  • Financial leasing services

Authentication and consulting services

  • Verification services
  • Authentication services
  • Consulting services

Radio, film and television services

  • Production services for radio, film and television programs (works)
  • Distribution services for radio, film and television programs (works)
  • Broadcast (including screenings) services for radio, film and television programs (works)

Business supporting services

  • Enterprises management services
  • Brokerage and agent services
  • Human resources services
  • Security and protective services

Other modern services

Lifestyle services

  • Cultural and sports services
  • Education and medical services
  • Catering and accommodation services
  • Daily services
  • Other lifestyle services

Sales of intangible assets refer to activities of transferring owner­ship or rights of use of intangible assets. Intangible assets shall refer to assets that can bring out economic interest without tan­gible forms, including technologies, trademarks, copyrights, goodwill, rights of use of natural resources and other beneficial intangible assets.

Sales of immovable properties refer to activities of transferring ownership of immovable properties. Immovable properties shall refer to the properties that cannot be moved or will be changed in nature or in shape after moved, including buildings, structures, etc.

Classes of VAT taxpayers and applicable VAT rates. Under the VAT pilot rules, the following are the two classes of VAT taxpayers:

  • General VAT taxpayers, which are VAT taxpayers providing VAT pilot services with annual turnover of CNY5 million or more
  • Small-scale VAT taxpayers, which are VAT taxpayers providing VAT pilot services with annual turnover of less than CNY5 million

It is possible for small-scale VAT taxpayers to voluntarily apply to become general VAT taxpayers.

The following lists show the applicable VAT rates for the various classes of VAT taxpayers and the different types of VAT pilot services.

General VAT taxpayers

17% rate

  • Movable property leasing

11% rate

  • Transportation services
  • Postal services
  • Basic telecommunication services
  • Construction services
  • Sales of immovable properties acquired or developed after 1 May 2016
  • Leasing of immovable properties acquired or developed after 1 May 2016
  • Transfer of land use right

6% rate

  • R&D and technology services
  • Information and technology services
  • Culture and creative services
  • Logistics supporting services
  • Authentication and consulting services
  • Radio, film and television services
  • Business supporting services
  • Other modern services
  • Value-added telecommunication services
  • Loan services
  • Direct financial services
  • Insurance services
  • Financial product trading
  • Cultural and sports services
  • Education and medical services
  • Catering and accommodation services
  • Daily services
  • Other lifestyle services
  • Sales of intangible assets

S% rate

  • Sales of immovable properties acquired or developed before 30 April 2016
  • Leasing of immovable properties acquired or developed before 30 April 2016
  • Transfer of land use right acquired before 30 April 2016
  • Financial leasing contract signed before 30 April 2016 by gen­eral taxpayers or financial leasing services with leasing object being immovable properties and the properties were acquired before 30 April 2016 (optional)
  • Labor dispatching service
  • Human resource outsourcing service

3% rate

  • Non-academic education services
  • Interest income from agricultural loan provided by Agricultural Development Bank of China and its affiliates
  • The following construction service provided by general VAT taxpayers (optional):
    • Construction service providers who do not purchase materi­als or purchase ancillary materials
    • Old construction projects (projects with a commerce date before 30 April 2016)

Small-scale VAT taxpayers

S% rate

  • Sales of immovable properties by small-scale VAT taxpayers
  • Leasing of immovable properties by general VAT taxpayers
  • Labor dispatching service

3% rate

  • Other VAT pilot services

Place of supply of VAT pilot services. The supply of services, intangible goods and immovable properties would refer to the following:

  • Either the supplier or the recipient of services (except for the lease of immovable properties) or intangible assets (except for natural resource user right)
  • The sold or leased immovable properties are located in China
  • The natural resource for which the user right is sold is located in China
  • Other situations regulated by the MOF and SAT

The following supplies would be considered as outside of China:

  • Overseas entities or individuals supply taxable services or intangible assets that are completely incurred overseas to enti­ties or individuals within the territory
  • Overseas entities or individuals lease tangible property that is completely used overseas by entities or individuals within the territory
  • Other circumstances regulated by the MOF and SAT

Output VAT and new VAT computation method. The following is the calculation for output VAT:

Output VAT = Sales amount x Applicable VAT rate

If consideration received by a VAT pilot service provider is VAT-inclusive, the following is the calculation of the sales amount:

Sales amount = VAT-inclusive sales amount / (1 + Applicable VAT rate)

The VAT pilot rules contain a new computation method, which incorporates the “netting” mechanism. Only the following ser­vices specified by law could be applicable to the netting mecha­nism:

  • Financial leasing with approval from the People’s Bank of China, the Ministry of Commerce and the China Banking Regulatory Commission. The sales amount shall be the balance of the total price and expenses (including residual value) after deduction of the loan interest (including foreign currency loan and CNY loan interest), customs duties, import taxes, installa­tion fees and insurance borne by the lessor.
  • Transfer of financial products
  • Agency services
  • Tourism services
  • Construction services applicable to simplified methods
  • Sale of immovable properties developed by the real estate com­panies that are general VAT payers
  • Labor dispatching services
  • HR outsourcing services

If a pilot taxpayer concurrently sells goods, provides processing and maintenance services and provides VAT pilot services, it must separately account for the different supplies that are subject to different VAT rates. If the taxpayer cannot separately account for the VAT-able sales amount, it must compute its output VAT based on the higher VAT rate.

The VAT pilot rules include the concept of deemed supply of services. A special valuation method applies if a deemed supply of services exists or if the sales amount for VAT pilot services is found to be too high or low without a reasonable commercial purpose.

Input VAT and new creditable item. General VAT taxpayers that incur VAT on the purchase of goods, the receipt of processing, repair and maintenance services and the receipt of VAT pilot services, for the purpose of providing VAT pilot services, may treat the VAT incurred as input VAT. The following input VAT amounts may be credited against output VAT:

  • VAT amounts indicated on special VAT invoices issued by the sellers or service providers
  • VAT amounts indicated on import VAT payment certificates
  • 13% of the purchase value of agricultural products purchased from primary agricultural producers or agricultural cooperative societies unless special VAT invoice or import VAT payment certificates are obtained
  • The input VAT on road, bridge and gate tolls paid by general VAT taxpayers can be calculated on the basis of the fee amount indicated in the toll invoice received by the taxpayers
  • VAT amounts indicated on the tax clearance certificate (with­holding VAT) obtained from the tax bureau if a payment is made to an overseas VAT pilot service provider
  • In addition, with respect to motorcycles, cars and yachts for which consumption tax shall be collected, the input tax associ­ated with the purchases is allowed to be deducted from the output tax

The VAT pilot rules contain specific provisions that disallow input VAT recovery.

Input tax on the real estate acquired by general VAT payers after 1 May 2016 and accounted for as fixed assets under the account­ing system, as well as their real estate construction in progress after 1 May 2016, shall be deducted from output tax by 2 yearly installments at a deduction ratio of 60% in the first month and 40% in the 13th month of obtaining the special VAT invoices.

VAT administration matters. Suppliers of VAT pilot services with annual revenue of more than CNY5 million must be registered as general VAT taxpayers. After registration, the suppliers must purchase the anti-counterfeit tax control equipment and issue special VAT invoices in accordance with the VAT pilot rules.

The Chinese VAT tax periods vary in length. A VAT tax period may be 1 day, 3 days, 5 days, 10 days, 15 days, 1 month or 1 quarter. The length of the tax period is determined by the local tax authorities, based on the amount of VAT payable by the tax­payer. For taxpayers that have a VAT tax period of 1 month or 1 quarter, they must submit VAT returns and pay the VAT due on a monthly or quarterly basis within 15 days after the end of the period.

Transitional VAT exemption and VAT refund policies. According to Circular 36, there are 40 specific VAT exemptions set out in Appendix 3 of Circular 36, two types of transactions that could qualify for VAT refund upon collection measures and two types of transactions that could qualify for VAT deductions measures.

For VAT pilot taxpayers who have obtained BT incentives before 1 May 2016, VAT incentives could be enjoyed in accordance with Circular 36 until the expiry date of the BT incentive as approved prior to 1 May 2016.

VAT exemption and zero rating. According to Circular 36, the fol­lowing services rendered by domestic entities or individuals to overseas entities and consumed entirely outside of China are subject to a VAT zero rating:

  • International transportation services, including transportation services for Hong Kong, Macau and Taiwan
  • Space transportation services
  • Research and development services
  • Contractual energy performance services
  • Design services
  • Radio, film and television programs (works) production and distribution services
  • Software services
  • Circuit design and test service
  • Information systems services
  • Business process management services
  • Offshore outsourcing services, including information technol­ogy outsourcing (ITO), business process outsourcing (BPO) and knowledge process outsourcing (KPO)
  • Technology transfer

The provision of the following cross-border services as specified in Circular 36 could be exempt from VAT:

  • Construction service with the construction project outside China
  • Engineering supervision services with the construction project outside China
  • Engineering survey services with the engineering and mineral resources outside China
  • Conference and exhibition services for conferences and exhibi­tions that take place outside China
  • Warehousing services for storage locations outside China
  • Tangible personal property leasing services with the subject used outside China
  • Radio, film and television programs (works) broadcast services
  • Cultural and sports services, education and medical services, tourism services provided outside China
  • Postal service, collection and dispatching service and insurance services provided for export goods
  • International transportation services that are not eligible for a zero VAT rating
  • Transportation services from and to Hong Kong, Macau and Taiwan, as well as transportation services in Hong Kong, Macau and Taiwan that are not eligible for a zero VAT rating
  • Taxable services rendered to overseas entities or units and consumed entirely outside China:
    • Telecommunication services
    • Technical consulting services
    • Intellectual property services
    • Logistics and supporting services (excluding warehousing services, collecting and dispatching services)
    • Identification and consulting services
    • Business supporting services
    • Advertising services for advertising that takes place outside China
    • Intangible property
  • International transportation services provided by non-transport operating carriers
  • Direct chargeable financial services provided for the monetary financing between entities outside the territory and other finan­cial business operations, which are not related to any goods, intangible assets or real property within the territory

Please note that although SAT announcement [2016] No. 29 has set out the detailed guidance on the application of VAT exemp­tion, local state tax bureaus might issue their own practice requirements in response to the announcement.