China’s tax authorities recently issued three important circulars regarding export tax refunds. The circulars most notably clarify the Value-added Tax (“VAT”) treatment of zero-related services and introduce revisions to VAT refund policies. Below is a brief summary of the three circulars.
The State Administration of Taxation (“SAT”) issued a circular (“Bulletin 13”) on April 5, 2012,1 providing detailed implementation guidance for the VAT treatment of zero-rated services. Under Circular 131, issued by the Ministry of Finance (“MOF”) and the SAT and effective January 1, 2012,2 the “Exempt, Credit and Refund” method is applicable to VAT zero-rated services. Bulletin 13 clarifies the scope of zero-rated services applicable for VAT refund, and provides the calculation method and related administrative requirements for the VAT refund for such services.
The Scope of VAT Zero-rated Services
According to Bulletin 13, the following services are not included in the scope of zero-rated “international transportation services”, “R&D services” and “design services”:
- transportation services relating to the transport of cargo or passengers from domestic areas to special Customs supervision regions (or zones), or from special Customs supervision regions (or zones) to other domestic areas or other special Customs supervision regions (or zones); and
- R&D or Design services provided to entities located in special Customs supervision regions (or zones).
The provision of the above services is not eligible for zero rating and will be subject to VAT.
Calculation of Tax Refund
Bulletin 13 explains in detail the calculation of the VAT refund, which is similar to calculation methods currently applied to the export of goods.
To apply for the tax refund for zero-rated services, eligible service providers are required to satisfy certain tax compliance requirements set out by Bulletin 13.
- Registration for export refund. Eligible service providers must register with the appropriate tax authority before applying for the “Exempt, Credit and Refund” method for a tax refund.
- Refund filing and documentation requirements. Eligible service providers need to file the tax returns for the refund within the VAT filing period of the subsequent month (or quarter) after booking the service revenue for accounting purposes.
- Monitoring period for new zero-rated service providers. This monitoring period lasts for six months starting from the date when the pilot taxpayer begins to provide eligible services.
Circular 39 and Bulletin 24
In addition to Bulletin 13, two new recently issued regulations will also affect China’s tax policies for the export of goods and services. The MOF and the SAT jointly issued a tax circular, “Notice of VAT and Consumption Tax Policies for the Export of Goods and Services” (“Circular 39”),3 and the SAT has separately issued guidance (“Bulletin 24”)4 that summarizes the VAT and Consumption Tax (“CT”) administrative policies for the export of goods and services. Circular 39 and Bulletin 24 will consolidate previous regulations on the export VAT refund and introduce several significant revisions.
Circular 39 and Bulletin 24 clarify the conditions, scopes, taxable basis and tax refund rates of exported goods and services, the calculation of export tax refund/exemption, application procedures, deadlines and relevant documentation requirements. Specific revisions to China’s current export tax policies under Circular 39 and Bulletin 24 include:
- Changing the tax treatment of certain non-VAT refundable exports. The export of qualified goods and services on which export enterprises fail to apply for the export tax refund/exemption or fail to provide relevant outstanding documents within the prescribed time limit to the tax authorities after the above application will be exempt from VAT. Such exports were deemed as domestic sales and were subject to VAT before the promulgation of Circular 39.
- The application deadline for the export tax refund is extended to the period from the month after the customs declaration of the export to April 30 of the following year.
- Elimination of a “probation period”. There is no probation period for small businesses and companies newly engaged in the export business. Previously, there was a 12 month prohibition period.
- The VAT completion certificate issued by Customs is now included in the documentation requirements to apply for the export tax refund.
Circular 39 and Bulletin 24 replace a series of circulars/articles related to export tax refund/exemption, which are included in the two circulars as appendices.