(“Circular [2014] No. 43”) 财政部、国家税务总 局关于将电信业纳入营业税改征增值税试点的通知), issued by the State Administration of  Taxation (“SAT”) and the Ministry of Finance (“MOF”)

As expected, telecommunications services is the next sector participating in  China’s business tax (“BT”) to value-added tax (“VAT”) reform.

Circular 43’s key features are the following:

  1. It classifies telecommunications services into two  categories subject to  different VAT rates: basic telecommunication services and value-added  telecommunications services
  • Basic telecommunications services are the provision of voice  communication services through a fixed network, mobile network,  satellite and internet, and leasing or selling bandwidth, wavelength and  other network activities.  An 11%  VAT rate is applied to  basic  telecommunications services.
  • Value-added telecommunications services are the provision of shortmessage service, multimedia message service, electronic  data/information transmission and application service, internet access,  and ground transfer of satellite television signal through fixed network,  mobile network, satellite, internet and cable TV network. A 6% VAT rate  is applied to the value-added telecommunications services.
  1. Favorable policies
  • Telecommunications services that domestic entities or individuals provide  to overseas entities are exempt from VAT.
  • Telecommunication services redeemed through raward points are not  subject to VAT.
  • Donation services China Mobile Limited, China United Network  Communications Group Co., Ltd, China Telecommunications Corporation  and their member companies provide through short-message services to  listed charity institutions in Circular 43 are subject to VAT on a net basis.

As the VAT rates are much higher than the 3% BT rate, telecommunications  enterprises are expected to have a heavy tax burden, at least in the short term,  as the cost may not be passed on immediately to customers. Even as businesses  continues to develop, the VAT burden on telecommunications enterprises may  not reduce significantly, as they rely heavily on using input VAT incurred for  purchasing and maintaining or upgrading facilities and infrastructures related to  telecommunications businesses, while the daily operation does not involve many  upstream suppliers with VAT charges.

Date of issue: April 29, 2014. Date of effectiveness: June 1, 2014.