China’s new regulation on value-added tax (VAT), which went into effect on 1 August 2013, may increase charges on exports originating from China by up to 6 per cent. Circular No. 37 of 2013, jointly issued by China’s Ministry of Finance (MOF) and State Administration of Taxation (SAT), provides for the replacement of business tax with the VAT on a nation-wide basis. A pilot program for the current VAT policy was introduced in Shanghai in January 2012 and subsequently expanded to nine other areas in China.
According to Circular No. 37, while international shipping is not subject to VAT, logistics, and ancillary services such as shipping agents, freight forwarding, customs clearance, and warehousing are subject to a 6 per cent VAT (domestic shipping is subject to an 11 per cent VAT). Circular No. 37 also appears to repeal the “net calculation basis” provided under the previous business tax regime and the VAT pilot program, which allowed logistics service providers to deduct international freight from the taxable income.
China’s new VAT regulation may raise the charges on its exports in at least two ways. First, it is unclear whether international carriers are exempt from VAT. Since major international carriers have China offices from which the billing of China shippers originates, they may be treated as shipping agents rather than providers of shipping services under the new VAT regulation, which would subject them to the new VAT. As a result of the uncertainty of coverage, several international carriers have started to debit 6 per cent VAT on all charges payable to service providers in China.
A second uncertainty impacts intermediaries, such as freight forwarders and shipping agents. These service providers may need to pay for the 6 per cent VAT on their gross revenue rather than net revenue as of 1 August 2013. This is because of the apparent repeal of the “net calculation basis” under the new regulation. Intermediaries dealing with domestically sold goods may claim a VAT input credit if they obtain a VAT invoice from the domestic shippers showing the VAT has already been paid on the domestic freight. However, intermediaries dealing exports do not appear to have this option, as international shipping is not subject to the VAT.
MOF and SAT are reportedly examining these issues and may provide further guidance on the application of the new VAT regulation to international shipments.
If China’s new VAT regulation does raise charges on China’s exports, it may raise international tax and WTO concerns. China has bilateral tax treaties with many countries (including the United States) that exempt international transportation income from taxation. China also committed in its WTO Accession Protocol to eliminate all taxes and charges on most exports originating from China. If China’s new VAT regulation has a discriminatory or disproportionate impact on exports, the regulation may be inconsistent with China’s treaty commitments even if the VAT is generally considered an internal tax.