APAC Tax Matters: 13th edition

China

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At a glance

  • Launch of the Value-Added Tax (VAT) Pilot Arrangements for the transportation industry and certain modern service industries

Notice regarding the launch of the Value-Added Tax (VAT) Pilot Arrangements for the transportation industry and certain modern service industries on a nationwide basis (Caishui [2013] No. 37)

The Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly released Caishui [2013] No. 37 (“Circular 37”) on 24 May 2013 to announce the launch of VAT pilot arrangements for the transportation industry and certain modern service industries (hereinafter referred to as “VAT Pilot Arrangements”) on a nationwide basis from 1 August 2013. Circular 37 reorganizes, adjusts and refines existing tax policies related to VAT Pilot Arrangements.

Key provisions of Circular 37 are as follows:

Items Provisions in Circular 37
Scope of VAT taxable services
  • Services related to production, distribution and broadcasting of radio, film and television programs are included in the scope of certain modern service industries under VAT Pilot Arrangements.
  • Circular 37 re-categorizes advertising design services into the scope of design services that fall within the scope of advertising services under Caishui [2011] No. 111 (“Circular 111”, i.e., notice regarding the VAT Pilot Arrangement in Shanghai).
  • Advertising agency services are included in the scope of advertising services.
Credit of input VAT Input VAT incurred for motorcycles, automobiles and yachts that are subject to Consumption Tax (CT) and used by original general VAT taxpayers, are allowed to be used to credit against output VAT.
Simplified VAT calculation
method

General VAT taxpayers may choose to be subject to VAT by a simplified calculation method for income derived from public transportation services.

Further to services related to long distance passenger transportation, shuttles, subway and urban light rails, scope of the public transportation services would be expanded to cover services related to passenger ferry, public passenger transportation and taxi.

Transitional treatments

The following transitional treatments are abolished:

  • VAT on a netting basis applicable to transportation, storage, advertising agency and international freight forwarding services that were previously
    subject to Business Tax (BT) on a netting basis;
  • Input VAT credit calculated according to freight notes (excluding railway freight notes);
  • Entities or individuals from a country/region, that has not signed an Agreement for the Avoidance of Double Taxation related to international transportation income, shall be subject to VAT at 3% for international transportation services provided to domestic entities or individuals (that meet relevant requirements) on a withholding and provisional basis.
Tax reduction/Exemption

For VAT taxable services that are applicable for both zero VAT rate and VAT exemption policies, zero VAT rate shall take priority.

The following services are newly-included in the applicable scope of VAT exemption, unless zero VAT rate applies according to rules stipulated by the MOF and the SAT:

  • Offshore services related to the distribution and broadcasting of radio, film and television programs;
  • Cross-border transportation services between Mainland China and Taiwan/Hong Kong/Macao and transportation services in Taiwan/Hong Kong/Macao by VAT pilot taxpayers who have not obtained relevant transportation licenses to enjoy the zero VAT rate treatment;
  • Services provided to overseas entities related to the production of radio, film and television programs, time charter, voyage charter and wet lease.

The new VAT pilot policies announced in Circular 37 principally introduce the changes noted below and evidence the efforts of the government to standardize and upgrade the tax system and reduce the burden of taxpayers:

  • Clarify the definition of small scale taxpayers, i.e., non-enterprises units that do not frequently provide VAT taxable services can choose to pay VAT as small-scale taxpayers
  • Scope of VAT taxable services has been expanded to cover services related to the production, distribution and broadcasting of radio, film and television programs
  • Scope of special VAT invoices for input VAT credit purposes should include special cargo business VAT invoices and unified invoices for sales of motor vehicles
  • Reduce VAT burden of VAT pilot taxpayers by allowing the credit of input VAT incurred for motorcycles, automobiles and yachts that are subject to CT and used by original general VAT taxpayers
  • Enhance preferential tax policies by giving priority to a zero VAT rate when VAT taxable services are eligible for both the zero VAT rate and VAT exemption policies