China’s pilot value-added tax ("VAT") reform program ("Pilot Program") became effective in Shanghai on January 1, 2012. China continues to expand the VAT Pilot Program to replace the Business Tax. The Pilot Program currently applies to transportation services and six other "modern service" industries.
On July 25, 2012, the State Council announced that from August to the end of 2012, the Pilot Program would expand to eight additional provinces and cities: Beijing, Tianjin, Jiangsu, Zhejiang (including Ningbo), Anhui, Fujian (including Xiamen), Hubei, and Guangdong (including Shenzhen).
All additional pilot locations implemented the same rules as Shanghai.
Foreign service providers rendering qualifying services to entities and individuals located in the trial areas will also be subject to the VAT rather than the business tax.
Two new statutory VAT rates – 11 percent and 6 percent – have been added to the program’s original 17 percent rate. The applicable rate depends on the type of qualifying service, as follows:
Pilot Program industries and Applicable VAT rates for general VAT taxpayers are as follows:
Click here to view table.
In Shanghai, Company A sells 100 units of equipment to Company B and also provides information technology services to Company B. If the value of the equipment is RMB 1,000,000 (excluding VAT) and the service fee for the information technology services is RMB 1,000,000 (excluding VAT) :
- Prior to the Pilot Program, the output VAT of Company A=(RMB 1,000,000+RMB 1,000,000)*17%=RMB 340,000
- The input VAT deductable by Company B was RMB 340,000
- Under the Pilot Program, the output VAT of Company A=RMB 1,000,000*17%+RMB 1,000,000*6%=RMB 230,000
- The input VAT deductible by Company B is RMB 230,000
As a result of the Pilot Program, Company A would pay VAT RMB 110,000 less. (RMB 340,000-RMB 230,000=RMB 110,000).
The announcement of the Pilot Program’s expansion stated that in 2013 the VAT Pilot Program would be further expanded geographically, and certain industries would be included in the Pilot Program on a national basis. Note that the U.S. does not provide a foreign tax credit for VAT.
In our experience, many companies express confusion with the Pilot Program. Common issues include the rules for qualifying as small-scale taxpayers or general taxpayers, supporting evidence for input VAT, and rules on VAT refunds, service export VAT refunds, and withholding VAT for non-resident taxpayers.