Detailed implementation rules released for China s VAT reform pilot program in Shanghai

Transcription

1 Detailed implementatin rules released fr China s VAT refrm pilt prgram in Shanghai Fllwing the State Cuncil s 26 Octber 2011 decisin t launch the VAT refrm pilt prgram in Shanghai, China s Ministry f Finance (MOF) and the State Administratin f Taxatin (SAT) jintly issued guidance n 16 Nvember 2011 t prvide detailed implementatin rules fr the prgram. Althugh the guidance des nt address all issues, it des clarify many questins. The MOF/SAT guidance n the pilt prgram is in the frm f tw Circulars: Ntice fr the Intrductin f the Pilt Scheme t Cnvert Business Tax t VAT (Circular 110)); and Ntice fr Cnverting frm Business Tax t VAT in the Transprtatin Industry and Certain Mdern Service Sectrs in Shanghai (Circular 111). Circular 111 is accmpanied by three appendices: Appendix 1: Measures fr Implementatin f Cnverting Business Tax t VAT in the Transprtatin Industry and Certain Mdern Service Sectrs (Implementatin Measures); Appendix 2: Regulatins n Relevant Issues fr Cnverting Business Tax t VAT in the Transprtatin Industry and Certain Mdern Service Sectrs (Relevant Issues); and Appendix 3: Regulatins fr the Transitinal Plicy fr Cnverting Business Tax t VAT in the Transprtatin Industry and Certain Mdern Service Sectrs (Transitin Rules). Under China s current indirect tax system, VAT is levied n the supply f gds, the prvisin f repair, prcessing and replacement services, and n imprts at the standard rates f 13% r 17%, while Business Tax (BT) is levied n the prvisin f ther services and the transfer f intangibles and real prperty at rates f 3% r 5% (with a maximum 20% rate applying t the entertainment industry). The c-existence f the VAT and BT systems has led t a number f issues, such as duble (r multiple) taxatin because f the availability f an input tax credit fr VAT payers with n such mechanism available under the BT system. The pilt prgram aims t reslve the duble taxatin issues under the prevailing system and t fster the develpment f specified mdern service industries by gradually transitining these industries frm liability t BT t liability t VAT. The pilt prgram is cnsidered a milestne fr Chinese VAT refrm and will have a significant impact n affected industries and cmpanies in China. Highlights f Circular 110 Circular 110 utlines the general principles fr the verall VAT refrm pilt prgram in China (althugh n date fr the full refrm pilt prgram is mentined). The Circular clarifies that the VAT refrm pilt prgram will be carried ut in tw phases: Phase 1: The initial pilt applicable t specific sectrs in Shanghai; and Phase 2: Rll ut f the pilt t ther regins, r natinwide, fr specified sectrs when cnditins permit. Once the tw pilt prgrams are cmpleted, the VAT refrm is expected t be rlled ut natinwide fr all service sectrs the third and final phase f the refrm. Circular 110 states the general principles f the verall refrm pilt prgram, which include: Cnfirmatin that the pilt prgram will cmmence n 1 January 2012 and, when cnditins permit, it is expected that the VAT refrm will be expanded natinwide. Applicable VAT rates: Leasing f mveable and tangible gds: 17%; Prvisin f transprtatin and cnstructin services: 11%; and Prvisin f ther specified mdern services: 6%. Financial and insurance services, as well as services prvided t cnsumers fr their daily needs, generally will be taxed using the simplified taxing methd, while ther service sectrs will be taxed using the rdinary taxing methd. (Under the simplified taxing methd, tax due is calculated by multiplying the sales amunt by the VAT levying rate (3%), but input VAT is nt recverable. By cntrast, under the rdinary taxing methd, the standard VAT rate will apply and input VAT is creditable against utput VAT.) Services prvided frm verseas and received in China will be subject t VAT at the abve rates. The prvisin f services frm China t verseas custmers will be exempt r zer rated fr VAT purpses. Wrld Tax Advisr Page 1 f 7 Cpyright 2011, Delitte Glbal Services Limited.

2 With respect t crss-regin taxatin, taxpayers cvered by the pilt prgram must pay VAT at the lcatin where their rganizatin is situated. BT paid in ther regins can be deducted when calculating the VAT due. Taxpayers that d nt fall within the scpe f the pilt prgram will cntinue t pay BT even if they are perating in the pilt regins. Highlights f Circular 111 Circular 111 sets ut detailed implementatin rules fr the initial pilt in Shanghai and these rules generally fllw the principles set ut in Circular 110. Sme f the principles in Circular 110 (such as the taxing methd fr cnstructin, telecmmunicatin, financial and insurance services) will nt be implemented in the initial pilt in Shanghai, but may be implemented at a later stage. Circular 111 addresses the Shanghai pilt specifically, the applicatin f VAT in the transprt and certain mdern services sectrs. The appendices primarily prvide details n three main tpics: the scpe and applicatin f VAT, the right t deduct input VAT and preservatin f the current BT incentives. Circular 111 is drafted t fllw the current VAT rules, s the mechanisms fr an input VAT credit r simplified taxing methd, the pint f taxatin, classificatin f taxpayers and administrative measures, remain unchanged. The fllwing fcuses n the main features f the appendices. Appendix 1 Implementatin measures This Appendix aims t clarify the scpe f the charge t VAT. The Implementatin Measures are applicable t entities and individuals lcated in the pilt regin (i.e. Shanghai) and freign entities and individuals that prvide taxable services t entities and individuals lcated in the pilt regin. The Implementatin Measures address the relevant issues within eight chapters, including the definitin f taxpayers and withhlding agents, the definitin f VAT taxable services, applicable tax rates, calculatin f VAT liabilities, the pint f tax and lcatin f the tax payment, tax reductin and exemptin, tax cllectin and administratin and supplementary articles. Scpe f service sectrs selected fr the pilt prgram Transprtatin services invlving carg r passengers, including transprtatin by land (excluding railway transprtatin), water, air and pipeline; R&D and technlgy services, such as transfers f technlgy and technlgy cnsulting; Infrmatin and technlgy services, including sftware related services, circuit design and testing services, IT system services and prcess and prcedure management services; Creative cultural services, including design, transfers f cpyrights and trademarks, services related t intellectual prperty rights, advertising, and cnference and exhibitin services; Lgistics and ancillary services; Leasing (including perating and finance leasing) f mveable and tangible gds; and Attestatin and cnsulting services. An attachment t Appendix 1, referred t as Anntatins t the VAT Items, prvides detailed explanatins f the scpe f each service categry. Treatment f prvisin and receipt f services within and utside China If either the service prvider r the service recipient is lcated in China, the prvisin f the relevant services will be cnsidered t be prvided in China and, thus, subject t VAT. The fllwing services, hwever, will nt be deemed t be prvided in China, s n VAT will be due: The prvisin f the relevant services by verseas cmpanies r individuals t Chinese cmpanies r individuals and the services are used entirely utside China; The leasing f mveable and tangible gds by verseas cmpanies r individuals t Chinese cmpanies r individuals and the gds are used entirely utside China; and Other situatins as stipulated by the MOF and the SAT. Wrld Tax Advisr Page 2 f 7 Cpyright 2011, Delitte Glbal Services Limited.

3 Services within the scpe f VAT The prvisin f transprtatin and certain mdern services free f charge, except thse prvided fr the benefit f public welfare, will fall within the scpe f VAT, as will ther situatins stipulated by the MOF and the SAT. Applicable VAT rates The fllwing VAT rates will apply: Leasing f mveable and tangible gds: 17% Transprtatin services: 11% Certain mdern service sectrs (excluding the leasing f mveable and tangible gds): 6% Other taxable services stipulated by the MOF and the SAT: 0% VAT levying rate used under the simplified taxing methd: 3% (as is currently the case). Input VAT The input VAT that can be recvered is as fllws: Input VAT amunt stated n the special VAT invice; Imprt VAT amunt stated n the Imprt VAT Payment Certificate issued by Custms; 13% n the purchase vucher fr agricultural prducts; The recipient f transprtatin services can deduct input VAT based n the special VAT invice btained fr transprtatin services purchased. In cases where n VAT special invice is btained, the recipient f the services can claim an input VAT deductin at the deductin rate f 7% based n the transprtatin fee specified in the transprtatin fee receipt; Where services are prvided by verseas entities r individuals and received in China, the VAT withheld by the recipient in Shanghai will be eligible fr recvery if supprted by a tax payment clearance certificate. Written cntracts, payment certificates and debit ntes, r invices issued by the verseas entities must be prvided t supprt the claim. Appendix 2 Relevant issues Appendix 2 aims t clarify certain issues with regard t pilt taxpayers, withhlding agents and current VAT payers. Right t deduct payments t nn-pilt cmpanies Fr industries that are allwed t be taxed n a net incme basis under the current BT rules, if the taxpayer under the pilt prgram makes a payment t a nn-pilt cmpany that qualified fr deductin under current BT rules, in calculating the VAT utput fr the taxpayer, the payment still culd be deducted frm the incme fr VAT purpse t achieve cnsistent treatment. Clarificatin f right t deduct fr current general VAT payers Input VAT incurred fr VAT taxable services prvided by taxpayers in the pilt prgram is creditable. The creditable amunt is the input VAT amunt shwn n the special VAT invice. Input VAT incurred fr transprtatin services prvided by small-scale taxpayers in the pilt prgram is creditable (7% n the invice amunt). Input VAT incurred fr VAT taxable services prvided by verseas suppliers is recverable by current VAT payers participating in the pilt regin. The creditable amunt is the input VAT amunt shwn n the tax payment certificate. Input VAT that is nt eligible fr deductin includes the receipt f passenger transprtatin services, transprtatin services related t purchased gds, wrks-in-prgress and finished gds that are in an abnrmal lss situatin. Transprtatin fee settlement receipts issued in Shanghai n and after 1 January 2012 cannt be used t claim an input VAT credit because a special VAT invice must be issued fr the prvisin f transprtatin services in Shanghai. Wrld Tax Advisr Page 3 f 7 Cpyright 2011, Delitte Glbal Services Limited.

4 Input VAT incurred thrugh 31 December 2011 that is assciated with the riginal VAT taxable activities cannt be credited against the utput VAT assciated with new taxable services after 1 January VAT registratin threshld fr the pilt The annual service revenue threshld fr general VAT payers is CNY 5 millin (inclusive). Small-scale VAT payers that have sund accunting systems and are able t prvide accurate dcumentatin fr tax filing purpses can apply fr general VAT payer status even if their sales revenue des nt reach CNY 5 millin; this is cnsistent with current VAT rules. It will nt be necessary t reapply fr recgnitin f general VAT payer status if a current general VAT payer als engages in VAT taxable services and meets the CNY 5 millin threshld. General VAT payers may nt cnvert t small-scale taxpayer status unless s stipulated by the SAT. Appendix 3 Transitinal rules Appendix 3 mainly aims t prvide VAT incentives, by intrducing a VAT exemptin r VAT cllectin with an immediate refund mechanism, t preserve the BT incentives currently enjyed n certain services. Exemptin frm VAT Technlgy transfers, technlgy develpment and related technlgy cnsulting and technical services prvided by taxpayers in the pilt prgram; Qualified ffshre utsurcing services prvided by cmpanies established in Shanghai during the perid 1 January 2012 t 31 December 2013; and Ship inspectin services prvided by the Shipping Classificatin Sciety, direct flights between Taiwan and the Mainland and ther miscellaneus items VAT cllectin with an immediate refund Dmestic carg transprtatin services, warehusing services and lading and unlading services prvided by taxpayers in the pilt prgram and registered in the Yangshan Free Trade Prt Area; Taxpayers that hire a specified number f handicapped persns and prvide VAT taxable services; Pilt general VAT payers that prvide pipeline transprtatin services (eligible fr a VAT refund in excess f 3% f their actual VAT burden); and Authrized finance leasing cmpanies included in the pilt prgram (eligible fr a VAT refund in excess f 3% f their actual tax burden fr the prvisin f finance leasing services f mveable and tangible gds). Cmments An analysis f Circulars 110 and 111 and the appendices reveals issues that need t be examined further t fully understand their impact. Services cvered Althugh Circular 111 clarifies the scpe f particular mdern service sectrs in the Shanghai pilt that will be carried ut as frm 1 January 2012 and prvides detailed infrmatin n these taxable items within the Anntatins, taking int accunt the diversity and cmplexity f typical business arrangements, it is pssible that the rules will nt cver all situatins. Affected cmpanies shuld begin immediately t take a practive apprach and seek clarificatin frm the cmpetent tax authrities. Service sectrs that are nt cvered in Circular 111, such as cnstructin, telecmmunicatin and financial and insurance services, may be included in the pilt at a later stage. As such, cmpanies in these sectrs shuld clsely mnitr develpments. Threshld fr VAT registratin The mandatry VAT registratin requirement fr general VAT payers is set at CNY 5 millin f annual sales revenue, as cmpared t the existing CNY 800,000 r CNY 500,000 fr manufacturing r trading cmpanies, respectively. The higher threshld is welcmed because mre taxpayers will be classified as small-scale taxpayers subject t the lwer rate f 3% withut suffering an additinal cmpliance burden. Wrld Tax Advisr Page 4 f 7 Cpyright 2011, Delitte Glbal Services Limited.

5 Place f supply rules fr services Bth circulars address the place f supply f services. Circular 110 prvides the general principle fr services supplied in varius regins thrughut China and fr services supplied frm, and received in, China. Circular 111 prvides certain detailed implementatin rules. Crss-regin supplies 1. Taxable services supplied by a pilt taxpayer in Shanghai t an entity lcated utside f Shanghai VAT will be due and the pilt taxpayer in Shanghai will be able t issue a special VAT invice t the service recipient prvided the recipient is a general VAT payer; A service recipient that is a general VAT payer will be able t recver the input VAT charged by the pilt taxpayer; Accrding t Circular 110, where services are prvided by a pilt taxpayer utside Shanghai, if the taxpayer has paid BT fr the service in the lcatin in which the services are prvided, the amunt f BT paid may be deducted when calculating VAT due fr the pilt taxpayer. Hwever, it is still unclear hw the deductin mechanism wuld wrk in practice and this may require further clarificatin. 2. Taxable services supplied by an entity utside f Shanghai t a pilt taxpayer lcated in Shanghai BT will apply n the services prvided by the entity lcated utside f Shanghai; Such BT will nt be recverable by the pilt taxpayer lcated in Shanghai. On a related issue, since taxpayers are determined based n the place in which their rganizatin is lcated and given that a head ffice and its branch ffices are different taxpayers, it is reasnable t cnclude that branches lcated in ther places will nt be affected by the pilt prgram in Shanghai even if the head ffice lcated in Shanghai is affected, and vice versa. This will give rise t managerial cmplicatins fr cmpanies perating natinwide, but als may create sme tax planning pprtunities t shift affected businesses between an affected entity and an unaffected entity. Supplies frm and received in Shanghai frm verseas 1. Taxable services supplied frm verseas The general rule is, if either the service prvider r the service recipient is lcated in China, the prvisin f services under the pilt will be cnsidered t be prvided in China and, thus, subject t VAT. Thus, all services supplied frm verseas t Shanghai are taxable in Shanghai. This is cnsistent with the current BT rules. Nevertheless, the pilt prgram aims t address a lng-standing debate n the taxatin f services prvided and enjyed verseas, i.e. whether sme frm f zer rating shuld apply when services are prvided and enjyed utside China. The new exceptins are fr: Services prvided by verseas suppliers and used entirely utside China by China entities r individuals; and The leasing f mveable and tangible assets prvided by verseas suppliers and used entirely utside f China by China entities r individuals. Circular 111 als prvides a withhlding mechanism fr charging VAT n services prvided by verseas suppliers in Shanghai where a VAT charge applies but there is n VAT-registered rganizatin in Shanghai. In these circumstances, the pilt taxpayer will have t withhld the VAT payable n behalf f the verseas supplier at the applicable rate. Such VAT can be recvered by service recipients that have general VAT payer status. Fr taxpayers that are unable t recver VAT at all, the burden in these circumstances likely will increase where the applicable VAT rate is higher than the current BT rate (e.g. 6% VAT as ppsed t the current 5% BT). 2. Taxable services supplied frm Shanghai t verseas Circular 110 cnfirms an imprtant change that services supplied t an verseas recipient are withut VAT. Hwever, it is unclear whether such supplies will be exempt r zer rated. Understanding the crrect VAT treatment is critical as it will have an immediate impact n whether the input VAT assciated with the services is Wrld Tax Advisr Page 5 f 7 Cpyright 2011, Delitte Glbal Services Limited.

6 recverable (as csts attributable t a zer rated supply) r nt (as csts attributable t an exempt supply). Neither Circular 110 nr Circular 111 answers this questin. BT incentives A welcmed cnfirmatin is that, as prmised in the State Cuncil s initial annuncement f the pilt prgram, the current BT incentives (e.g. R&D and technlgy-related activities and qualified ffshre utsurcing services) will remain intact during the pilt. The survival f the BT incentives has been implemented thrugh a VAT exemptin mechanism that effectively achieves the same result as a BT exemptin. Mrever, the tax cllectin with an immediate refund methd will be used t achieve the effect f tax-exempt treatment fr certain industries. Cmpliance The VAT cmpliance requirements generally fllw the current VAT rules. Hwever, enterprises that are new t VAT and unfamiliar with VAT cmpliance bligatins will need mre practical guidance and infrmatin, but will still need t ensure they are prepared fr the fllwing: The actins required t be cmpliant, such as registratin prcedures (frms and dcuments needed t supprt the applicatin). Based n past experience, it is likely that the Shanghai tax bureau will assist with the practicalities by hlding training sessins and issuing cmmunicatins with affected taxpayers; Timeline fr apprval f applicatins; Unless there are simplificatins, VAT returns generally must be submitted n a mnthly basis with a submissin date f the 15th f the fllwing mnth. Therefre, cmpanies will need t ensure that data is available t cmply with the first return due n 15 February 2012; The special VAT invice will cntinue t be required t claim an input VAT credit. Hwever, this rule indicates that affected services prvided by nn-taxpayers cvered by the pilt prgram will nt be recverable by taxpayers in the prgram because the nn-taxpayers are unable t issue a special VAT invice fr the prvisin f such services. Such nn-recverable taxes wuld becme a cst t taxpayers in the pilt prgram. Planning Sme f the rules annunced in the tw circulars culd prvide immediate planning pprtunities and it is imprtant t take actin nw as there is a small windw f pprtunity. Where cmmercially pssible, cmpanies shuld cnsider the fllwing: Current BT payers: deferring the purchase f assets t 1 January 2012 when they fall within the scpe f the VAT scheme t allw a deductin f the 17% VAT; Current BT payers that will becme VAT payers: take int accunt custmers within and utside f China: Fr services within China cnsider billing befre 1 January 2012 t avid the additinal tax nw because the cntract price is fixed (5% BT vs. 6% VAT). This als will help t reduce the lcal surcharges that are calculated based n the VAT r BT due. Fr services supplied utside China cnsider deferring billing t after 1 January 2012 t mitigate the charge t VAT. This will be especially effective fr inter-cmpany transactins, as it will reduce the existing BT burden paid by the verseas party. Fr services payable by China advance the pint f taxatin if the cmpany cannt recver VAT at all s the tax payable remains a 5% BT rather than a 6% VAT. Fr cmpanies charging service fees (especially fr affected services) t affiliate cmpanies within China cnsider aligning the charge scheme with the pilt prgram t maximum VAT taxable service revenue. Fr cmpanies actively engaged in service activities in Shanghai withut an establishment cnsider the establishment f an rganizatin in Shanghai t take advantage f pprtunities. Fr cmpanies in the prcess f centralizing service functin (especially fr affected services) int Shanghai cnsider accelerating the rerganizatin prcess t take advantage f pprtunities. Fr cmpanies in the pilt prgram that are subject t different VAT rates r that prvide bth BT and VAT taxable services cnsider restructuring internal and external perating arrangements t maximize benefits under the pilt prgram, i.e. clearly identify assets t be used fr VAT-related activities. Cnclusin Taxpayers that are able t recver VAT under the current system will reap an immediate benefit under the pilt prgram, but taxpayers that will be subject t a high VAT rate as cmpared t the current BT rate withut much VAT input may benefit less frm the pilt prgram. Wrld Tax Advisr Page 6 f 7 Cpyright 2011, Delitte Glbal Services Limited.

7 With nly a mnth and a half befre the pilt cmmences in Shanghai, affected taxpayers shuld begin t act nw t prepare fr the pilt, particularly fr cmpliance purpses (e.g. register fr VAT, apply fr general VAT payer status, etc.). A strategic and methdlgical apprach is essential fr cmpanies t make a successful transitin frm BT payer status t VAT payer status. Liqun Ga (Shanghai) Partner Delitte China liga@delitte.cm.cn Sarah Chin (Shanghai) Partner Delitte China sachin@delitte.cm.cn Candy Tang (Shanghai) Senir Manager Delitte China catang@delitte.cm.cn Abut Delitte Delitte refers t ne r mre f Delitte Glbal Services Limited, a UK private cmpany limited by guarantee, and its netwrk f member firms, each f which is a legally separate and independent entity. Please see fr a detailed descriptin f the legal structure f Delitte Glbal Services Limited and its member firms. Delitte is the brand under which tens f thusands f dedicated prfessinals in independent firms thrughut the wrld cllabrate t prvide audit, cnsulting, financial advisry, risk management, and tax services t selected clients. These firms are members f Delitte Tuche Thmatsu Limited (DTTL), a UK private cmpany limited by guarantee. Each member firm prvides services in a particular gegraphic area and is subject t the laws and prfessinal regulatins f the particular cuntry r cuntries in which it perates. DTTL des nt itself prvide services t clients. DTTL and each DTTL member firm are separate and distinct legal entities, which cannt bligate each ther. DTTL and each DTTL member firm are liable nly fr their wn acts r missins and nt thse f each ther. Each DTTL member firm is structured differently in accrdance with natinal laws, regulatins, custmary practice, and ther factrs, and may secure the prvisin f prfessinal services in its territry thrugh subsidiaries, affiliates, and/r ther entities. Disclaimer This publicatin cntains general infrmatin nly, and nne f Delitte Glbal Services Limited, its member firms, r its and their affiliates are, by means f this publicatin, rendering accunting, business, financial, investment, legal, tax, r ther prfessinal advice r services. This publicatin is nt a substitute fr such prfessinal advice r services, nr shuld it be used as a basis fr any decisin r actin that may affect yur finances r yur business. Befre making any decisin r taking any actin that may affect yur finances r yur business, yu shuld cnsult a qualified prfessinal adviser. Nne f Delitte Glbal Services Limited, its member firms, r its and their respective affiliates shall be respnsible fr any lss whatsever sustained by any persn wh relies n this publicatin. Wrld Tax Advisr Page 7 f 7 Cpyright 2011, Delitte Glbal Services Limited.