To avoid double taxation, China started replacing its Business Tax to VAT in the transport sector and some service sectors in Shanghai from January 1 this year under the VAT reform pilot program.  Business Tax refers to a tax on the gross revenue of a business, while VAT means a tax levied on the difference between a commodity’s price before taxes and its cost of production.  Following the circulars replacing Business Tax to VAT in Shanghai, the Ministry of Finance and the State Administration of Taxation jointly released another Circular to clarify issues regarding the application of zero VAT rate and VAT exemption in Shanghai.  According to the Circular, companies in the following service sectors will enjoy zero VAT rate:

  • international transport services (including cross-border and overseas transport of both passengers and cargo);
  • research and development services provided to overseas entities;;
  • design services provided to overseas entities (excluding design services provided in respect of domestic immovable property).

Note, however, that only enterprises and individuals that have obtained operational licenses will be eligible for zero rate preferential treatment.

Furthermore, the following taxable services provided by the entities and individuals in Shanghai shall be exempt from VAT:

  • engineering survey and exploration services for overseas projects and minerals resources;
  • meeting and exhibition services for overseas meetings and exhibitions;
  • overseas warehousing services;
  • tangible movable property leasing services for the overseas use of the subject matter;
  • international transport services provided by entities or individuals without obtaining the operational licenses;
  • other taxable services provided to foreign entities, including technology transfer services, technical consultation services, energy performance contracting (except for the subject matter of the contract located in China), software services, circuit design and test services, information system services, business flow management services, trademark and copyright transfer services, intellectual property services, logistics and auxiliary services (excluding warehousing services), and services of certification, assurance, and advisory (except for goods and immovable properties located in China), as well as advertising services of which advertisements released in a foreign country.

It is expected that the VAT reform will be rolled out to Beijing, Chongqing and Tianjin in July 2012, and then to Shenzhen and Jiangsu in early 2013 before being applied more broadly across China.