Global Tax Alert | 18 June 2013

China issues guidance on nationwide launch of VAT Pilot Arrangements for transportation industry, certain modern service industries

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The PRC Ministry of Finance and the State Administration of Taxation 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 builds upon the State Council announcement made on 10 April 2013 that unveiled VAT Pilot changes introduced in 2013. Circular 37 repeals various previously issued VAT reform related guidance and reorganizes, adjusts and refines existing tax policies related to the VAT Pilot Arrangements.

Key features of Circular 37 are outlined below.

Revisions to existing VAT Pilot policies

Certain revisions to VAT Pilot policies under Circular 37 are as follows:


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 recategorizes advertising design services to design services.
  • 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 the original taxpayers who qualify for general VAT taxpayer status, are allowed to be used to credit against output VAT.

Simplified VAT calculation method

General VAT taxpayers may choose a simplified calculation method for income derived from public transportation services. It was clarified that the scope of public transportation services would be expanded to cover services related to passenger ferry, public passenger transportation and taxis.

Transitional treatments

The following transitional treatments are repealed:

  • VAT on a netting basis applicable to transportation, storage, advertising agency and international freight forwarding services that were previously subject to business tax on a netting basis;
  • Input VAT credit calculated according to freight notes (excluding railway freight notes);
  • 3% VAT on a withholding or provisional basis on international transportation services provided to domestic entities or individuals (that meet relevant requirements) if the entities or individuals are from a country/region, that have not signed a treaty related to international transportation income.

Tax reduction/exemption

  • For VAT taxable services that are applicable for both zero VAT rate and VAT exemption policies, zero VAT rate will apply.
  • The following services are newly included in the applicable scope of VAT exemption, unless zero VAT rate applies:
    • Offshore services related to the distribution and broadcasting of radio, film and television programs;
    • Cross-border transportation services between the Mainland 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 following changes in Circular 37 reflect the government's efforts to standardize and upgrade the tax system, and reduce taxpayers' burden:

  • Clarify the definition of small scale taxpayers.
  • Expand the scope of VAT taxable services to cover services related to the production, distribution and broadcasting of radio, film and television programs.
  • Include in the scope of special VAT invoices for input VAT credit purposes special cargo business VAT invoices and unified invoices for sales of motor vehicles.
  • Reduce VAT burden for VAT pilot taxpayers by allowing the credit of input VAT incurred for motorcycles, automobiles and yachts that are subject to consumption tax 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.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (China) Advisory Limited, Shanghai
  • Robert Smith
    +86 21 2228 2328
  • Kevin Zhou
    +86 21 2228 2178
  • Bryan Tang
    +86 21 2228 2294
Ernst & Young (China) Advisory Limited, Beijing
  • Kenneth Leung
    +86 10 5815 3808
Ernst & Young (China) Advisory Limited, Shenzhen
  • Michael CS Lin
    +86 21 2228 3006
Ernst & Young Tax Services Limited, Hong Kong
  • Jane Hui
    +852 2629 3836
  • Becky Lai
    +852 2629 3188
Ernst & Young LLP, China Tax Desk
  • David Kuo
    +1 212 773 3660
  • Vickie Lin
    +1 212 773 6001
  • Susan Qiu
    +1 212 773 9382
  • Jessia Sun
    +1 212 773 5955
  • Diana Wu
    +1 408 947 6873
Ernst & Young LLP, Asia Pacific Business Group
  • Chris Finnerty
    +1 212 773 7479
  • Jeff Hongo
    +1 212 773 6143
  • Kaz Parsch
    +1 212 773 7201
  • Bee-KhunYap
    +1 212 773 1816

EYG no. CM3536