On 23 March 2016, the PRC Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued the Notice of Overall Pilot Execution of Transforming Business Tax into Value-added Tax (i.e., the circular Caishui [2016] No. 36, hereinafter referred to as “the Circular”).  According to the Circular, the VAT reform in China will be expanded to all industries, including finance industry, lifestyle service industry and real property and construction industry (“Newly Added Industries”), from 1 May 2016.  With this expansion of the VAT reform, Business Tax will be completely abolished. We summarise the main contents of this Circular below according to the following four aspects:

Details

1. Main changes of the Circular, compared with the previous regulations on VAT reform:

  1. The scope of taxable activities has been expanded to “sales of services (including transportation services, postal services, telecommunication services, construction services, financial services, modern services and lifestyle services), intangible assets or immovable properties in the territory of China”. 
  2. The VAT withholding agent for outbound service fee payment to a foreign enterprise or individual who does not have a place of business in China has been changed from the foreign party’s agent in China to the “purchaser” of the services.
  3. The scope of “deemed sales” transactions has been expanded to include “provision of services for free” and “transfer of intangible assets and immovable properties for free”.
  4. Provision of transportation services, postal services, basic telecommunication services, construction services, leasing of immovable properties and transfer of immovable properties and land use rights are subject to a VAT rate of 11%.  Leasing of movable properties is subject to a VAT rate of 17%.  Other taxable services are subject to a VAT rate of 6%.
  5. The scope of input VAT that can be used for credit purposes has been expanded to include the VAT arising from the purchase of services, intangible assets or immovable properties.
  6. The scope of input VAT that cannot be used for credit purposes has been expanded to include the VAT arising from intangible assets and immovable properties purchased for projects taxed under simplified taxation method, VAT-exempted projects, welfare or personal consumption. In addition, the input VAT corresponding to abnormal loss of immovable properties, construction-in-progress and associated goods, design and construction services consumed cannot be used for credit either. The scope of “abnormal loss” has been expanded to include the situation where goods or immovable properties are confiscated, destroyed or dismantled due to the violation of laws and regulations.  Non-creditable input VAT of the fixed assets, intangible assets or immovable properties = net value of fixed assets, intangible assets or immovable properties (after depreciation or amortization according to the accounting standards) * applicable VAT rate
  7. The input VAT arising from the purchase of passenger transportation services, loan services, catering services, routine lifestyle services and entertainment services cannot be used for credit purposes.
  8. Under the circumstance where the taxpayer (subject to general taxation method) also operates projects under the simplified taxation method or VAT-exempted projects and the non-creditable input VAT cannot be split out from the total input VAT amount, the following formula applies: 

Non-creditable input VAT = total input VAT from which the non-creditable input VAT cannot be split * (sales of projects under simplified taxation method + sales of VAT-exempted projects) / total sales of the period

  1. The taxpayer undertaking business of sales of goods, services, intangible assets or immovable properties shall separately calculate the sales subject to different VAT rates or VAT levy rates.  Otherwise the higher VAT rate shall apply to the total sales.
  2. Under the circumstance where the price of taxable activities is apparently low or high without reasonable business purpose or the price is zero, the applicable scope of items on which the price for taxation purpose is deemed by the tax authorities has been expanded to include intangible assets and immovable properties.
  3. Under the circumstance where no written agreement is concluded or the date of payment is not stipulated in the written agreement, the time when the VAT obligation arises for sales of services, intangible assets or immovable properties should be the date when the services, transfer of intangible assets are completed or the ownership of immovable properties is changed.  The time when the VAT obligation arises for construction services and leasing services for which prepayment is received in advance should be the date of the receipt of the prepayment.  The time when the VAT obligation arises for the transfer of financial commodities should be the date when the ownership of the financial commodities is transferred.
  4. Individuals providing construction or immovable properties leasing services or transferring immovable properties or use right of natural resources should declare VAT with the tax authorities of the place where the construction services are provided or the place where the immovable properties or natural resources are located.
  5. Banks, financial companies, trust investment companies and credit cooperatives should pay VAT on a quarterly basis.
  6. The situations where special VAT invoices are not allowed to be issued are expanded to include the sales of services, intangible assets or immovable properties to individual consumers.
  7. In defining the taxable activities, the following further clarifications have been made:
    1. Non-vessel operating common carrier services are subject to VAT for transportation services;
    2. Construction services are added to the taxable activities and such services include project engineering services, installation services, renovation services, decoration services and other construction services.
    3. Financial services are added to the taxable activities and such services include loan services (including lease-back after sales), financial services with direct service charges, insurance services and transfer of financial commodities.
    4. Market investigation services are treated as “consulting services”.
    5. “Business auxiliary services” have been introduced as a new type of modern services.  Such services include corporate management services, brokerage and agency services, human resource services and security guard services.
    6. “Lifestyle services”, as a type of newly added taxable services this time, include cultural and sports services, education and healthcare services, travel and entertainment services, catering and hospitality services, citizens’ routine lifestyle services and other lifestyle services.
    7. “Sales of intangible assets”, as a type of newly added taxable activities, include the transfer of either the ownership or the use right of intangible assets such as technologies, trademarks, copyrights, goodwill, use rights of natural resources and other intangible rights.
    8. “Sales of immovable properties”, as a type of newly added taxable activities, refer to the transfer of the ownership of immovable properties.

2. Supplementary policies granted to the Newly Added Industries include the following:

  1. The following items have been clarified as not being subject to VAT:
    1. Railway or air transportation services provided for free for the purpose of social welfare under the command of the state;
    2. Interest of deposits;
    3. Insurance compensation obtained by the insured;
    4. Special residential reparation fund received by the authorities in charge of property or its designated institutions, administrative centres of housing fund, real property developers and property management parties; and
    5. The immovable properties or land use rights transferred in an asset restructuring transaction (such as merger, spin-off, sales, exchange) under which the relevant credit rights, debts and labor forces are transferred together with the assets.
  2. Taxable sales revenues for the Newly Added Industries are defined as follows:
    1. Loan service: total interest or interest alike received from the loan service;
    2. Financial service with direct service charges: total charges received such as the commission fee, compensation, management fee, service fee, account opening fee, account transfer fee, settlement fee, fee for consignment of management;
    3. Transfer of financial commodities: the selling price minus the buying price.  The loss of transfer (due to the selling price lower than the buying price) cannot be carried forward to the next accounting year for taxation purpose.  The buying price can be calculated on the basis of either “weighted average method” or “moving weighted average method”, which cannot be changed within the next 36 months once one method is selected.  Special VAT invoices are not allowed to be issued for transfer of financial commodities;
    4. Brokerage and agency service: the total proceeds received minus the charges levied relating to the governmental funds or administrative fees.  Special VAT invoices are not allowed to be issued for the charges levied relating to the governmental funds or administrative fees;
    5. Financial leasing and financial lease-back after sales:
      1. Financial leasing services provided by taxpayers approved by the People’s Bank of China (“PBOC”), China’s Bank Regulatory Commission (“CBRC”) or Ministry of Commerce (“MOFCOM”): the total proceeds received minus the loan interest minus the interest of bonds issued minus vehicle purchase tax;
      2. Financial lease-back after sales provided by taxpayers approved by PBOC, CBRC or MOFCOM: the total proceeds received (excluding principals) minus the loan interest minus the interest of bonds issued;
      3. Transition Policy A: Contracts of “financial lease-back after sales” of movable properties concluded before 30 April 2016 can continue to be subject to VAT for the taxable item of “financial leasing of movable properties” till the contracts expire.  In calculating the taxable amount, the taxpayer can select to deduct the principals received from the lessee or not, but if the principals are deducted, special VAT invoices are not allowed to be issued for the amounts of principals (and only normal VAT invoices are allowed);
      4. Transition Policy B: Taxpayers approved by the local bureaus of MOFCOM and the governments of national economic and technological development zones to undertake financial leasing services can implement the policies listed in item (a), (b) and (c) above from the month when the paid-in capital reaches RMB 170 million after 1 May 2016 and such policies are valid till 31 July 2016 for the situations where the registered capital reaches RMB 170 million after 1 May 2016, but all the policies listed in item (a), (b) and (c) above can no longer be implemented by these taxpayers after 1 August 2016.
    6. Travel service (the taxpayer can select the following amount for taxation purpose): the total proceeds received minus the charges paid to other parties such as the accommodation fees, catering fees, transportation fees, visa fees, fares and other fees paid to other travel service companies for reception.  If such taxation method is selected, special VAT invoices are not allowed to be issued for the deducted amounts (and only normal VAT invoices are allowed);
    7. Construction service subject to simplified taxation method: the total proceeds received minus the subcontract fees;
    8. Sales of developed real properties by real property developers as general VAT payers (excluding those “old projects” subject to simplified taxation method as a kind of transition policy): the total proceeds minus land acquisition prices paid to the governments.  The “old projects” refer to the real estate projects starting before 30 April 2016 according to the Construction Permit; Please note that any amount deducted from the total proceeds for taxation purpose, as stipulated above, should be supported with valid vouchers.  Otherwise no deduction is allowed for taxation purpose.
  3. Input VAT for the Newly Added Industries is defined as follows:
    1. Input VAT relating to the immovable properties or relevant construction-in-progress acquired by the taxpayers subject to general taxation method after 1 May 2016: can be deferred for credit within two years with credit of 60% in the first year and the remaining 40% in the second year.  The immovable properties under financial lease or the temporary buildings built on the construction site are not subject to the input VAT credit deferral above;
    2. Input VAT that is non-creditable previously but can now be used for credit due to the change of purpose of the relevant fixed assets, intangible assets and immovable properties: equals net value of the relevant assets * applicable VAT rate / (1 + applicable VAT rate);
    3. Input VAT due to investment advisory fee, commission fee, consulting fee, etc. directly relating to the loan services acquired by the taxpayer: non-creditable
  4. General VAT payers of the Newly Added Industries can select the simplified taxation method for the following taxable activities:
    1. Cultural and sports services;
    2. Transition Policy A: operating lease services based on the leased movable properties acquired before the date of VAT reform;
    3. Transition Policy B: the uncompleted lease contracts of movable properties that are concluded before the date of VAT reform.
  5. Construction services:
    1. Simplified taxation method can be selected for adoption by the general VAT payer providing pure construction services (or plus auxiliary materials) without providing equipment and main materials.
    2. Transition Policy: Simplified taxation method can be selected for adoption by the general VAT payer providing construction services for “old projects”.
    3. Tax issues of general VAT payers providing cross-region (i.e., cross counties or cities) construction services which are subject to the general taxation method:
      1. Taxable amount equals the total proceeds received minus the subcontract fees;
      2. Pay VAT at the place where the construction services are provided based on a 2% VAT prepayment rate and declare VAT at the place where the taxpayer is located
    4. Tax issues of general VAT payers providing cross-region (i.e., cross counties or cities) construction services for which the simplified taxation method is adopted and small-scale VAT payers providing such services:
      1. Taxable amount equals the total proceeds received minus the subcontract fees;
      2. Pay VAT at the place where the construction services are provided based on a 3% VAT levy rate and declare VAT at the place where the taxpayer is located
  6. Sales of immovable properties:
    1. Transition Policy A: Simplified taxation method can be selected for adoption by the general VAT payer who acquires the immovable properties (excluding self-construction) before 30 April 2016:
      1. Taxable amount equals the total proceeds received minus the acquisition price;
      2. Pay VAT at the place where the immovable properties are located based on a 5% VAT levy rate and declare VAT at the place where the taxpayer is located
    2. Transition Policy B: Simplified taxation method can be selected for adoption by the general VAT payer who self-constructs the immovable properties before 30 April 2016:
      1. Taxable amount equals the total proceeds received;
      2. Pay VAT at the place where the immovable properties are located based on a 5% VAT levy rate and declare VAT with the place where the taxpayer is located
    3. Transition Policy C: Simplified taxation method with 5% VAT levy rate can be selected for adoption by real property developers as general VAT payers who sell “old projects”.
    4. General taxation method should be adopted by the general VAT payer who acquires the immovable properties (excluding self-construction) after 1 May 2016:
      1. Taxable amount equals the total proceeds received;
      2. Pay VAT at the place where the immovable properties are located based on the total proceeds received minus acquisition price and a 5% VAT prepayment rate and declare VAT at the place where the taxpayer is located
    5. General taxation method should be adopted by the general VAT payer who self-constructs immovable properties after 1 May 2016:
      1. Taxable amount equals the total proceeds received;
      2. Pay VAT at the place where the immovable properties are located based on the total proceeds received and a 5% VAT prepayment rate and declare VAT at the place where the taxpayer is located
    6. Tax issues of small-scale VAT payers (excluding proprietorships and other individuals) selling acquired (excluding self-constructed) immovable properties:
      1. Taxable amount equals the total proceeds received minus the acquisition price;
      2. Pay VAT at the place where the immovable properties are located based on a 5% VAT levy rate and declare VAT at the place where the taxpayer is located
    7. Tax issues of small-scale VAT payers selling self-constructed immovable properties:
      1. Taxable amount equals the total proceeds received;
      2. Pay VAT at the place where the immovable properties are located based on a 5% VAT levy rate and declare VAT with the place where the taxpayer is located
    8. The sales of “old projects” by real property developers as small-scale VAT payers are subject to a 5% VAT levy rate.
    9. Prepayments received by real property developers are subject to a 3% VAT prepayment rate when the prepayments are received.
    10. Tax issues of other individuals selling acquired (excluding self-constructed) immovable properties:
      1. Taxable amount equals the total proceeds received minus the acquisition price;
      2. Pay VAT based on a 5% VAT levy rate
  7. Operating lease of immovable properties:
    1. Transition Policy A: Simplified taxation method can be selected for adoption by the general VAT payer providing operating leasing services of immovable properties which are acquired before 30 April 2016.  The taxpayer should pay VAT based on a VAT levy rate of 5% at the place where the immovable properties are located and declare VAT at the place where the taxpayer is located.
    2. Transition Policy B: Simplified taxation method can be selected for adoption by the general VAT payer charging tolls of highways on which the construction starts before 30 April 2016.  The taxpayer should pay VAT based on a VAT levy rate of 3%.
    3. General VAT payers leasing the immovable properties which are acquired in another county or city after 1 May 2016 should pay VAT based on a 3% VAT prepayment rate at the place where the immovable properties are located and declare VAT at the place where the taxpayer is located.
    4. Small-scale VAT payers leasing the immovable properties (excluding the lease of residential houses by individuals) which are acquired in another county or city after 1 May 2016 should pay VAT based on a 5% VAT levy rate at the place where the immovable properties are located and declare VAT at the place where the taxpayer is located.
    5. Other individuals leasing the immovable properties (excluding the lease of residential houses) should pay VAT based on a 5% VAT levy rate.
    6. Individuals leasing the residential houses should pay VAT based on a reduced 1.5% VAT levy rate for calculation purpose.
  8. In the event that the general VAT payer selects to adopt general taxation method for the immovable properties acquired or self-constructed before 30 April 2016,
    1. If the immovable properties are acquired:
      1. Taxable amount equals the total proceeds received;
      2. Pay VAT at the place where the immovable properties are located based on the total proceeds received minus the acquisition price and a 5% VAT prepayment rate and declare VAT at the place where the taxpayer is located
    2. If the real property developer as a general VAT payer sells “old projects” or a general VAT payer leases the immovable properties acquired before 30 April 2016, it should pay VAT at the place where the immovable properties are located based on the total proceeds received and a 3% VAT prepayment rate and declare VAT at the place where the taxpayer is located.
    3. If the immovable properties are self-constructed:
      1. Taxable amount equals the total proceeds received;
      2. Pay VAT at the place where the immovable properties are located based on the total proceeds received and a 5% VAT prepayment rate and declare VAT at the place where the taxpayer is located
  9. If the final VAT payable is considerably lower than the prepaid VAT in the aforementioned relevant cases, the State Administration of Taxation can notify the tax authorities of the place where the construction services are provided or the immovable properties are located to suspend the VAT prepayment during a certain period of time.

3. Most of the transitional preferential VAT treatments are inherited from the original preferential treatments under the Business Tax system and some treatments have already been covered by the pilot VAT reform scheme (i.e., Circular Caishui [2013] No. 106).  These preferential treatments include:

  1. 40 VAT-exempted activities with public welfare-related nature or encouraged by the government;
  2. refund of VAT exceeding 3% of the sales relating to providing pipeline transportation services, qualified financial leasing services and lease-back after sales of movable properties;
  3. direct VAT reduction for qualified entrepreneurial projects;
  4. suspension of VAT payment for the financial enterprises’ uncollected interest after 90 days after the due date until the overdue interest is actually collected;
  5. For places other than Beijing, Shanghai, Guangzhou and Shenzhen, (1) VAT exemption for sales of residential houses acquired and held by individuals for more than 2 years and (2) the total sales proceeds subject to a 5% VAT levy rate if the houses are sold within the 2 years above; for Beijing, Shanghai, Guangzhou and Shenzhen, (1) VAT exemption for sales of normal residential houses acquired and held by individuals for more than 2 years, (2) the total sales proceeds minus acquisition price subject to a 5% VAT levy rate for the sales of non-normal residential houses acquired and held for more than 2 years, and (3) the total sales proceeds subject to a 5% VAT levy rate if the houses are sold within the 2 years above.

4. VAT treatments for cross-border taxable activities:

  1. Provision of the following cross-border taxable activities is subject to zero-rate VAT (i.e., VAT refund is available):
    1. International transportation services;
    2. Aerospace transportation services;
    3. Following services provided to the overseas entity and consumed purely offshore: R&D services, contract energy management services, design services, broadcast and film making and distribution, software services, circuit design and testing services, IT system services, business process management services, offshore service outsourcing services, technology transfer
    4. The term “consumed purely offshore” refers to the situations where
      1. the service recipient is located overseas and the service does not have any connection with the goods and immovable properties in China; or
      2. the intangible asset is used purely offshore and it does not have any connection with the goods and immovable properties in China.
  2. Provision of the following cross-border taxable activities is VAT-exempted (i.e., relevant input VAT is not creditable):
    1. Following services: construction services for offshore projects, construction supervision services for offshore projects, exploration services for projects or mineral resources offshore, conference and exhibition services for the conferences or exhibitions located overseas, warehousing services for offshore storage, leasing services for movable properties located overseas, broadcast and film playing services provided offshore, cultural and sports services provided offshore, education and healthcare services provided offshore and travel services provided offshore;
    2. Postal services, receipt and delivery services, insurance services provided for the goods for export;
    3. Following services or intangible assets provided to the overseas entity and consumed purely offshore: telecommunication services, intellectual property services, logistics auxiliary services (excluding warehousing services and receipt and delivery services), verification and consulting services, professional technological services, business auxiliary services, advertising services for the advertisements released offshore, intangible assets;
    4. International transportation services provided by non-vessel operating common carriers;
    5. Financial services with direct service charges for monetary financing or other financial business between foreign parties (and such services shall not be related to goods, intangible assets and immovable properties located in China);
    6. International transportation services provided by the taxpayers without relevant qualification 
  3. Sales of services or intangible assets to which zero rate is applicable shall be treated as VAT-exempted if these sales are subject to the simplified taxation method.
  4. The enterprises or individuals selling services or intangible assets qualified for zero-rate treatment can select to give up enjoying zero-rate treatment and adopt the treatment of VAT exemption or taxation.  The zero-rate treatment cannot be adopted within the next 36 months if the zero-rate treatment is claimed to be abandoned.