APAC Tax Matters: November 2012


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At a glance

  • VAT pilot scheme commences in other cities and provinces

VAT Pilot commences in Beijing, Anhui, Jiangsu, Fujian and Guangdong

Executive summary

From 1 August 2012 to the end of 2012, the VAT Pilot arrangements will be expanded to cover 10 additional locations. The VAT Pilot will further expand geographically and certain industries will be selected to be included in the VAT Pilot on a nationwide basis in 2013.

New VAT Pilot locations and start dates:

VAT Pilot location Start date of the VAT Pilot
Beijing 1 September 2012
Anhui Province and Jiangsu Province 1 October 2012
Fujian Province (including Xiamen) and
Guangdong Province (including Shenzhen)
1 November 2012
Tianjin, Zhejiang Province (including Ningbo) and Hubei Province 1 December 2012

Caishui [2012] No. 71 (Circular 71) makes specific references to the following Shanghai VAT Pilot circulars which set out the VAT rules for the Shanghai VAT Pilot arrangements. The VAT rules set out in these circulars will come into effect on the start date for each of the new VAT Pilot locations.

Shanghai VAT Pilot circulars Key features of the Shanghai VAT Pilot circulars*
Caishui [2011] No. 111
(Circular 111)

Circular 111 and its three appendices set out the rules governing the Shanghai VAT Pilot:

  • Appendix 1 – The general framework of the VAT Pilot including the scope of the VAT Pilot, the VAT rates applicable to the different categories of the VAT Pilot services and computation of VAT under the VAT Pilot, etc.
  • Appendix 2 – Supplementing the general VAT Pilot rules with specific details including the hybrid VAT computation method blending the Business Tax (BT) netting and general VAT computation method (i.e., Output VAT – Input VAT) and withholding VAT related input VAT recovery mechanism, etc.
  • Appendix 3 – Sets out specific details on the transitional rules which aim to enable a smooth transition for certain business taxable ("BTable") activities including 13 specific VAT exemptions and four special VAT refund measures
Caishui [2011] No. 131
(Circular 131)
Circular 131 sets out the VAT exemption and VAT zero-rating rules for specific provision of services which will be treated as "exportation of services"
Caishui [2011] No. 132
(Circular 132)
Circular 132 sets out the provisional measures for the VAT calculation and payment method applicable to a VAT Pilot taxpayer which has a headquarter based in Shanghai but operates across different provinces/cities
Caishui [2011] No. 133
(Circular 133)
Circular 133 sets out a number of supplementary VAT rules to address specific VAT issues such as the VAT treatment of used fixed assets, clarification on the application of general VAT computation methods, and the VAT and BT treatments for cross year supply of services, etc.
Caishui [2012] No. 53
(Circular 53)
Circular 53 sets out specific rules for international transportation services, animation and comics services, shipping agency services and operating leases

The general rules of the new VAT Pilot locations will follow those of the Shanghai VAT Pilot. The detailed definition of each of the “in scope” services has been set out in Circular 111.

There are two classes of VAT taxpayers under the VAT Pilot arrangements:

  • VAT general taxpayers providing VAT Pilot services with annual turnover of RMB 5 million or above
  • VAT small-scale taxpayers providing VAT Pilot services with annual turnover of less than RMB 5 million (please note that it is possible for small scale VAT taxpayers to voluntarily apply to become general VAT taxpayers)

The applicable VAT rates for the different classes of VAT taxpayers for the different types of VAT pilot services have been set out below:

VAT general taxpayers Movable property leasing 17%
Transportation services 11%
R&D and technology services,
Information technology services,
Cultural and creative services, logistics auxiliary services and authentication & consulting services
VAT small-scale taxpayers All VAT Pilot services 3%

The place of supply rules, VAT computation methods, withholding VAT arrangements, VAT exemption, VAT zero rating, transitional measures and other VAT rules that are applicable under the Shanghai VAT Pilot will continue to apply to the new VAT Pilot locations.

Please note that Circular 71 has also set out specific changes to the Shanghai VAT Pilot rules. Circular 71 also mentioned that a separate announcement would be issued to address VAT/BT issues for air transportation service providers registered in the new VAT Pilot locations.

Our observation

The current VAT and BT regimes that are applicable to the supply of goods and services have cascading effects and improvements have to be made to the current indirect tax system in order to support the development of the services industry.

The Chinese authorities have taken the first step to test the impact of combining the VAT and BT regimes for selected industries (i.e., transportation and some modern services) by introducing VAT Pilot arrangements in Shanghai from 1 January 2012. After implementing the VAT Pilot in Shanghai for over six months, the Chinese authorities have performed considerable research into the experiences of taxpayers and tax bureaus in adapting to the new VAT rules.

In addition to concluding that the Shanghai VAT Pilot has been a success, it has been reported that one of the recommendations made in a recent study led by the MOF and SAT was to speed up the roll out of the VAT Reform on a national basis. We further understand that the results of this study have been reported to the State Council.

The VAT Pilot arrangements have now been expanded to Beijing, Anhui, Jiangsu, Fujian and Guangdong provinces (“the five locations”). In this regard, concerns have been raised in respect of taxpayers who are “exporting” services and will potentially be subject to VAT exemption.

These taxpayers will no longer be making VAT or BT payments to the tax authorities of the five locations and it is difficult to gauge what the sentiment of the tax authorities will be when they face a sharp reduction in their tax revenues.

The Shanghai tax authorities have set out local interpretations/guidance on the VAT treatment applicable to certain business activities. For instance:

  • Definitions as to the scope of the VAT Pilot and corresponding VAT treatments (e.g., car leasing with a driver should be treated as transportation and subject to a VAT rate at 11% not 17%)
  • Clarification on the VAT computation methods (e.g., what are the deductibles to reduce the output VAT liabilities?)
  • Other clarifications including transitional VAT treatment for cross year leasing contracts and detailed instructions on how to fill in the VAT Return Form

It is uncertain whether and/or how these interpretations/guidance will be adopted under the VAT Pilot arrangements in the five locations. It is possible that the same services might be treated differently under the two VAT Pilot arrangements if the interpretations/guidance does not apply simultaneously in the different VAT Pilot locations.

It is also possible that the different VAT Pilot locations may introduce measures to extend some of the local BT preferential policies (e.g., the VAT preferential policy applicable to the Yangshan Port under the Shanghai VAT Pilot arrangements) to the VAT Pilot regime. This may create potential tax incentive competition between different VAT Pilot locations.


It is noted that most companies could have legal entities, branches and customers/suppliers in multiple VAT Pilot locations. It is important for companies to consider taking a holistic approach to tackling the issues stemming from the VAT Pilot expansion. Such an approach should provide more consistent results and will allow companies to leverage the work done in parallel for one location with another.

Given the wide geographic coverage of the VAT Pilot expansion, the comparatively short time for companies to react and the uncertainties on whether and how some of the local Shanghai VAT practices will be adopted by the five locations, businesses should start determining the total impact of the VAT Pilot expansion and be proactive in undertaking preparatory work which could take months to implement, especially if they operate in multiple locations.

The authorities will likely issue further specific rules/interpretation/guidance to address the local specific VAT issues which may only come to light after the implementation of the VAT Pilot. In this respect, businesses should also ensure that dedicated resources and efforts are planned in order to carefully assess the impacts of the VAT Pilot on their business operations and to prepare for the changes.

Consultation with tax professionals is also strongly recommended. You may click here to access the State Council’s announcement and the full content of Circular 71 (in Chinese only) as well as prior EY VAT Publications.

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