In our China Update circulated in January 2012, we reported that on 17 November 2011 the Ministry of Finance ("MOF") and the State Administration of Taxation ("SAT") introduced a pilot program in Shanghai to replace business tax on transportation services and 'modern' services ("Qualifying Services") with value-added Tax ("VAT") commencing on 1 January 2012. The modern services include R&D and technology services, IT services, cultural and innovation services, logistics services and consulting services. On 25 July 2012, the central government decided to expand the pilot program to 10 other provinces/cities in the period from 1 August 2012 to the end of 2012. On 31 July 2012, MOF and SAT issued a circular, specifying the following dates for these provinces/cities to adopt the pilot program:
- Beijing, 1 September 2012
- Jiangsu and Anhui, 1 October 2012
- Fujian and Guangdong, 1 November 2012
- Tianjin, Zhejiang and Hubei, 1 December 2012.
In general, the consequences for cross-border service providers are the following:
- Qualifying services provided by Chinese entrepreneurs to non-Chinese entrepreneurs will be either exempt from VAT or subject to VAT at the rate of 0% (i.e. VAT refunded). In contrast, such services were before subject to non-recoverable business tax at the rate of 5%.
- Chinese entrepreneurs will by way of a reverse charge become subject to VAT in respect of Qualifying Services received from non-Chinese entrepreneurs. The Chinese entrepreneur can subsequently offset such VAT against VAT payable by it. In contrast, such services were before subject to the non-recoverable business tax to be withheld upon payment by the receiving Chinese entrepreneur.