The State Administration of Taxation (“SAT”) recently issued SAT Order 2014 No. 11 (“Order No. 11”) which updates the administrative regulations on the VAT refund (exemption) treatment for zero-rated services. Order No. 11, which supersedes SAT Order 2013 No. 47 (“Order No. 47”) in its entirety, takes effect as of January 1, 2014.

While keeping most of the provisions specified under Order No. 47, including the mechanism and procedural requirements for the application of VAT refund (exemption) for zero-rated services, Order No. 11 has made amendments and supplements in the following main aspects:

  1. Expansion of the scope of zero-rated services. Pursuant to Order No. 47, zero-rated services encompass international transportation services, Hong Kong/Macao/Taiwan transportation services, as well as the R&D and design services provided to offshore entities. Given that railway transportation has been included in the scope of VAT transition reform since January 1, 2014, it is clarified under Order No. 11 that international railway transportation services and Hong Kong/Macao/Taiwan railway transportation services shall be eligible for zero-rated VAT. Also, space transportation service is added to the zero-rated services.
  2. In procedure, lessors who render time charter or wet lease to offshore parties would not be required to submit the vouchers evidencing the original constitution of the income when declaring VAT “exempt, credit and refund”.
  3. The documentation requirements for filing of VAT refund (exemption) by foreign trade enterprises engaged in rendering outbound R&D or design services, as well as the key items to be reviewed by the tax authorities and the relevant handling measures are clarified.  

KWM Comments:

Previously, for quite a long time, VAT refund (exemption) policies were mainly applicable to the exportation of tangible goods. With the implementation of the VAT transition reform, and with a view to promote the constant transformation and escalation of the landscape of domestic industries, the State encourages the exportation of services. In this context, certain prescribed outbound services have now been eligible for zero-rated VAT.

In general, the zero-rated VAT treatment means that a taxpayer, when providing the prescribed services, may not only be exempt from VAT (i.e. zero output VAT) but may also claim refund on the relevant input VAT, achieving zero VAT on the services.

The administrative rules for zero-rated VAT treatment, as a preferential policy, have widely attracted public attention. Order No. 11 not only reflected the latest development in the VAT transition reform by including railway transportation into the scope of the reform, but also clarified certain practice issues in the administration of zero-rated VAT, which would facilitate the application and administration of VAT refund (exemption) for zero-rated services.

We noticed that ever since the implementation of the VAT transition reform from 2012, the administrative regulations for VAT refund (exemption) of zero-rated services have undergone several amendments, from the prior SAT Order 2012 No. 13 (“Order No. 13”) and Order No. 47, to the most recent Order No. 11, which demonstrate the relevant rules are being perfected to accommodate the VAT transition reform. Taxpayers of the relevant industries should stay tuned with the development, and KWM will also keep you updated in the future.