On August 18, 2016, the State Administration of Taxation (“SAT”) released Announcement [2016] No. 53 (“Announcement 53) to clarify administrative matters relating to the VAT reform. This announcement lists crossborder services provided by overseas suppliers that are not subject to VAT in China. 

Under Circular Cai Shui [2016] No. 36, which extends the VAT reform nationwide to all sectors (“Circular 36,” see our legal flash of March 2016 for a detailed explanation), VAT taxable activities are defined as “provision of services, and sales of intangible assets and immovable property in the territory of China.” 

Circular 36 defines China’s VAT scope in terms of the location of the parties involved, regardless of the location of services (excluding services related to immovable property and natural resources). It provides a considerably broad VAT scope in China.

However, Circular 36 also provides specific rules regulating crossborder transactions in both directions and excludes the following transactions provided by overseas suppliers from the general rule, considering that, as they do not occur in Chinese territory, they are not subject to VAT in China: 

a) Overseas suppliers that provide domestic purchasers with services that entirely occur overseas.

b) Overseas suppliers that provide domestic purchasers with intangible assets that are entirely used overseas.

c) Overseas lessors that lease to domestic lessees tangible property that are entirely used overseas.

d) Other situations specified by the Ministry of Finance (“MOF”) and SAT.

However, the terms used are vague and there is no clarification on how the phrase “entirely occur overseas” should be interpreted, namely whether it refers to where the services are used or where they are provided. 

For example, in the case of consulting services provided entirely abroad, the place of use would result in these services being taxable in China. However, the place of provision would contradict this. 

Circular Cai Shui [2013] No.106, which was abolished by Circular 36, used the phrase “entirely consumed overseas” instead, which the tax authorities generally applied to services performed and used overseas at the same time and in the same place. In the absence of further guidance, tax authorities and taxpayers still use this interpretation.

Now, Announcement 53 specifies that the following services provided by overseas suppliers are not considered to occur in Chinese territory and, therefore, are not subject to VAT in China:

(1) Postal and delivery services provided overseas for outbound letters and packages.

(2) Construction and project supervision services provided to domestic purchasers at an overseas construction site.

(3) Engineering and exploitation services provided to domestic purchasers at an overseas project and resource site.

(4) Conference and exhibition services provided to domestic purchasers at an overseas conference and exhibition site.

The general principle that emerges from these specifications is that these services will be taxed in the jurisdiction where the supply of services is physically performed. In this sense, the above crossborder services are all (i) physically performed at an identifiable place, and (ii) consumed at the same time and in the same place where they are physically performed. These characteristics resemble the interpretation of former regulations and shed light on the phrase “entirely occur overseas.” Without further guidance, these characteristics could be used as a basis to consider whether a crossborder service provided by an overseas supplier entirely occurs overseas and whether it is taxable in China for VAT purposes.