On December 19, 2008, the Ministry of Finance and the State Administration for Taxation of the PRC jointly promulgated the Circular on Relevant Issues Regarding the National Implementation of the Value-Added Tax Reform, Cai Shui (2008) 170, the Circular). The Circular took effect on January 1, 2009.

The newly-revised Provisional Value-Added Tax Regulations, which became effective on January 1, 2009, allow value-added tax (VAT) credit on fixed assets throughout the country, and the Circular clarifies several critical issues regarding this new policy.  

First, the Circular specifies the scope of the “fixed assets” on which the input VAT incurred by a VAT taxpayer is allowed to be deducted from its output VAT. Qualified fixed assets include: (1) the fixed assets obtained by the taxpayer through a purchase, donation or capital contribution; and (2) self-made fixed assets (including the fixed assets rebuilt, expanded or installed by the taxpayer itself). In order to claim input VAT credit on such fixed assets, the taxpayer must obtain valid vouchers (Valid Vouchers) such as: (1) VAT special invoices; (2) import VAT payment certificates issued by the PRC customs authority; and (3) settlement documents for transportation costs. Since the Provisional VAT Regulations took effect on January 1, 2009, the Circular provides that, in order to credit the input VAT on fixed assets, a taxpayer must actually incur the input VAT and obtain Valid Vouchers on or after January 1, 2009.  

Second, the Circular sets forth how the provinces or areas (Pilot Areas) that had been covered under the pilot VAT reform policies (Pilot Policies) before January 1, 2009, would be dealt with during the transitional period. Since January 1, 2009, the Provisional VAT Regulations apply throughout the country, and the VAT refund regime under the Pilot Policies no longer applies in the Pilot Areas. Any VAT taxpayer in the Pilot Areas could have credited its input VAT on fixed assets that was incurred prior to 2009, but that was not refunded by the end of 2008, on a one-off basis in January 2009.  

In addition, the Circular provides for how to deal with the sale of self-used fixed assets. Under the Circular, (1) if a taxpayer sells self-used fixed assets that are purchased or self-made on or after January 1, 2009, the taxpayer will pay VAT at the applicable rate (usually 13 percent or 17 percent) for the sale; (2) if the taxpayer was not covered by the Pilot Policies before January 1, 2009, when the taxpayer sells self-used fixed assets purchased or self-made before January 1, 2009, the taxpayer will pay VAT at two percent for the sale; or (3) if the taxpayer was covered by the Pilot Policies before January 1, 2009, and sells self-used or self-made fixed asses, in the case that the fixed assets were purchased or self-made before the Pilot Policies took effect in the local area, the applicable VAT for the sale is two percent; however, in the case that the fixed assets were purchased or self-made after the Pilot Policies took effect in the local area, then the taxpayer will pay VAT at the applicable rate (usually 13 percent or 17 percent) for the sale. The Circular defines “self-used fixed assets” as fixed assets that have been depreciated according to the applicable accounting rules.  

The Provisional VAT Regulations have specified the circumstances in which the input VAT is not creditable. The Circular further provides how to calculate the non-creditable input VAT on fixed assets under some of the circumstances. Under the Circular, a certain amount of the input VAT on fixed assets that has been credited needs to be deducted from the taxpayer’s current month’s input VAT in certain situations (e.g., when mismanagement results in abnormal losses of such fixed assets). The Circular provides the following formula:  

Non-creditable input VAT = the net book value of the fixed assets after depreciation × the applicable VAT rate.  

The Circular also abolishes the VAT exemption policies for imported equipment, and the VAT refund policies for purchases of domestically-made equipment by foreign-invested enterprises. Another article in this issue of our China Update briefs you on the specific circular issued by the Ministry of Finance and the State Tax Administration on the latter. In addition, the Circular abolishes a set of circulars regarding the Pilot Policies.