China Tax Regulation Update - April 2016 Circular Number Issuance Date Effective Date Topic What is new? SAT Announcement [2016] No. 14 2016-3-31 2016-5-1 VAT administration of transfer of immovable properties After issuing the circular Caishui [2016] No. 36 (“Circular 36”) which expands the VAT reform to all industries from 1 May 2016, the State Administration of Taxation (“SAT”) has further issued several administrative measures to specify the VAT administration of certain special industries that will be newly added to the scope of VAT reform after 1 May 2016. This Announcement, which is one of those administrative measures, clarifies the VAT administration of transfer of immovable properties. It does not apply to those real estate developers who sell self-developed properties. The main contents are as follows: The Announcement reiterates the relevant taxation methods applicable to general VAT payers, small-scale VAT payers, proprietorships and individuals respectively. These taxation methods have been stipulated in Circular 36 already. VAT prepaid by non-individual taxpayers or VAT paid by individual taxpayers shall be calculated as follows: - Total sales proceeds / (1 + 5%) * 5% (if the total sales proceeds are treated as the taxable base); or - (Total sales proceeds – original acquisition price of the properties) / (1 + 5%) * 5% (if the total sales proceeds minus the original acquisition price are treated as the taxable base) In the event that the original acquisition price of the properties can be deducted from the total sales proceeds for taxation purpose, valid vouchers should be obtained to justify the deductible amounts. Such valid vouchers include: (1) tax invoices, (2) judgments, rulings, mediations issued by a court or arbitration awards, notarizations; or (3) other vouchers stipulated by the SAT. Prepaid VAT can be used to credit against the VAT payable of the current period. The balance of prepaid VAT after credit for the current period can be carried forward to the next period for credit. Small-scale VAT payers can apply with the tax authorities to issue VAT invoices on their behalf if they are not able to issue invoices by themselves. Special VAT invoices should not be issued to individual property transferees. Taxpayers failing to make VAT prepayment within 6 months after the due month shall be penalised according to the PRC Law of Administration of Taxation. SAT Announcement [2016] No. 15 2016-3-31 2016-5-1 Credit of input VAT relating to immovable properties Circular 36 has stipulated that immovable properties and immovable property-related construction-in-progress (excluding real estate developers’ self-developed properties, real properties of financial leasing and temporary buildings at the construction sites) obtained after 1 May 2016 shall be used for credit within 2 years (“credit deferral”), with 60% credited in the first year and the remaining 40% credited in the second year. The Announcement specifies the detailed implementation measures for such credit deferral treatment: Goods (i.e., materials and equipment constituting part of the immovable properties) and design or construction services, purchased after 1 May 2016 for building new immovable properties or renovating current immovable properties by raising their original value by more than 50%, shall also be subject to the credit deferral treatment. The 60% input VAT shall be used for credit in the current period when the relevant VAT voucher is obtained and the remaining 40% shall be used for credit in the 13th month after the month when the relevant VAT voucher is obtained. If there are goods or services whose corresponding input VAT has been fully used for credit and they are then used for immovable property-related constructionin-progress, 40% of the credited input VAT shall be transferred out and used for credit in the 13th month after the month when the using purpose of these items is changed. If immovable properties whose corresponding input VAT has been fully credited are used for projects where input VAT is not creditable, - non-creditable input VAT = (credited input VAT + input VAT to be credited) * net value ratio of the immovable properties - Net value ratio = net book value of the immovable properties / original value of the immovable properties If the non-creditable input VAT is not higher than the credited input VAT, the amount of non-creditable input VAT should be transferred out. If the non-creditable input VAT is higher than the credited input VAT, the amount of credited input VAT should be transferred out and the noncreditable input VAT exceeding the credited input VAT should also be transferred out from the input VAT to be credited. If an immovable property-related construction-in-progress incurs abnormal losses, the credited input VAT corresponding to the associated goods, design and construction services should be transferred out and the relevant input VAT to be credited shall not be creditable any more. If immovable properties whose corresponding input VAT has never been credited are used for projects where input VAT is creditable,creditable input VAT = the input VAT amount on the VAT vouchers (obtained after 1 May 2016) or the calculated input VAT * net value ratio of the immovable properties 60% of the creditable input VAT shall be used for credit in the month following the month when the using purpose of the immovable properties is changed. The remaining 40% of the creditable input VAT shall be used for credit in the 13th month after the month following the month when the using purpose of the immovable properties is changed. The unused balance of input VAT to be credited can be used for credit when the taxpayer performs the tax deregistration. SAT Announcement [2016] No. 16 2016-3-31 2016-5-1 VAT administration of operating lease of immovable properties This Announcement, which is one of the administrative measures issued by the SAT following Circular 36, clarifies the VAT administration of operating lease of immovable properties. It does not apply to the taxpayers providing road passage services. The main contents of this Announcement are as follows: The Announcement reiterates the relevant taxation methods applicable to general VAT payers and small-scale VAT payers respectively. These taxation methods have been stipulated in Circular 36 already. If a general VAT payer selects to adopt the general taxation method for leasing immovable properties obtained before 30 April 2016, it should be subject to the same taxation methods adopted by general VAT payers who lease immovable properties obtained after 1 May 2016. Proprietorships leasing residential houses can enjoy the same reduced 1.5% VAT levy rate which is granted to individual lessors of residential houses. If the taxpayer and the immovable properties for lease are located in the same municipal city or city with independent planning but in different counties or districts of that city, the state tax bureau of that city has the right to decide on whether the VAT prepayment should be made at the location of the immovable properties. VAT prepayments should be made within the tax declaration period of the month following the month when the rentals are received or the period deemed by the tax authorities. Calculation of VAT prepayment: -If the taxpayer is subject to the general taxation method, VAT prepayment = VAT-inclusive sales / (1 + 11%) * 3% -If the taxpayer (excluding the individual leasing residential houses) is subject to the simplified taxation method, VAT prepayment = VAT-inclusive sales / (1 + 5%) * 5% -If the taxpayer is a proprietorship leasing residential houses, VAT prepayment = VAT-inclusive sales / (1 + 5%) * 1.5% -If the taxpayer is an individual leasing residential houses, VAT prepayment = VAT-inclusive sales / (1 + 5%) * 1.5% -If the taxpayer is an individual leasing non-residential houses, VAT prepayment = VAT-inclusive sales / (1 + 5%) * 5% Prepaid VAT can be used to credit against the VAT payable of the current period. The balance of prepaid VAT after credit for the current period can be carried forward to the next period for credit. Small-scale VAT payers can apply with the tax authorities to issue VAT invoices on their behalf if they are not able to issue invoices by themselves. Special VAT invoices should not be issued to individuals. Taxpayers failing to make VAT prepayment within 6 months after the due month shall be penalised according to the PRC Law of Administration of Taxation. SAT Announcement [2016] No. 17 2016-3-31 2016-5-1 VAT administration of crosscounty/city/district construction services This Announcement, which is one of the administrative measures issued by the SAT following Circular 36, clarifies the VAT administration of cross-county/city/district construction services. It does not apply to the individuals providing cross-county/city/district construction services. The main contents of this Announcement are as follows: If the taxpayer provides construction services in another county or district of the same municipal city or city with independent planning, the state tax bureau of that city has the right to decide on whether this Announcement shall apply. The Announcement reiterates the relevant taxation methods applicable to general VAT payers and small-scale VAT payers respectively. These taxation methods have been stipulated in Circular 36 already. Calculation of VAT prepayment: - If the taxpayer is subject to the general taxation method, VAT prepayment = (total sales proceeds – subcontract fees) / (1 + 11%) * 2% - If the taxpayer is subject to the simplified taxation method, VAT prepayment = (total sales proceeds – subcontract fees) / (1 + 3%) * 3% If the amount of total sales proceeds minus subcontract fees is negative, the absolute value of this negative amount can be carried forward to the next VAT prepayment for deduction. VAT prepayments should be calculated and made on the basis of each project. Valid vouchers should be obtained to justify the subcontract fees deducted from the total sales proceeds for taxation purpose. Such valid vouchers include: (1) business tax invoices issued by the subcontractor before 30 April 2016 (which are valid for VAT prepayment before 30 June 2016); (2) VAT invoices issued by the subcontractor after 1 May 2016, indicating the location where the construction services are provided and the name of the project in the remark column; or (3) other vouchers stipulated by the SAT. The following documents should be submitted for VAT prepayment purpose: - VAT prepayment form; - Original and copy of the general construction contract; - Original and copy of the subcontract construction contract; - Original and copy of the invoice obtained from the subcontractor Prepaid VAT can be used to credit against the VAT payable of the current period. The balance of prepaid VAT after credit for the current period can be carried forward to the next period for credit. Small-scale VAT payers can apply with the tax authorities of the place where the construction services are provided to issue VAT invoices on their behalf if they are not able to issue invoices by themselves. Taxpayers failing to make VAT prepayment within 6 months after the due month shall be penalised according to the PRC Law of Administration of Taxation. SAT Announcement [2016] No. 18 2016-3-31 2016-5-1 VAT administration of self-developed real properties This Announcement, which is one of the administrative measures issued by the SAT following Circular 36, clarifies the VAT administration of self-developed real properties sold by real property developers. “Self-developed real properties” include those further developed properties based on the construction-in-progress acquired by the real property developers. The main contents of this Announcement are as follows: The Announcement reiterates the relevant taxation methods applicable to general VAT payers and small-scale VAT payers respectively. These taxation methods have been stipulated in Circular 36 already. Cost of the land to be deducted from the total sales proceeds for VAT purpose = (construction area of the real properties sold during the current period / total construction area of the real properties available for sale) * land acquisition price “Total construction area of the real properties available for sale” does not include the construction area of auxiliary public infrastructure that is not sold with separate prices. Valid fiscal payment vouchers (supervised by finance bureaus of province level or above) should be obtained to justify the deduction of land acquisition price. General VAT payers selecting the simplified taxation method (subject to a 5% VAT levy rate) for selling “old projects” should not change to apply the general taxation method within the following 36 months after the simplified taxation method is selected. No land acquisition cost is allowed for deduction for VAT purpose for sales of “old projects” if the simplified taxation method is adopted. VAT prepayment for payment received in advance = payment received in advance / (1 + applicable VAT rate or VAT levy rate) * 3%. The general taxation method is subject to a 11% VAT rate and the simplified taxation method is subject to a 5% VAT levy rate. The small-scale VAT payer is subject to a 5% VAT levy rate. For general VAT payers selling projects subject to both the general taxation method and the simplified taxation method (or VAT exemption) without ability to split the non-creditable input VAT, noncreditable input VAT = total input VAT that cannot be split for projects of different VAT natures * (construction scale of projects subject to the simplified taxation method or VAT exemption / total construction scale).“Construction scale” is listed on the Project Construction Permit. Prepaid VAT can be used to credit against the VAT payable of the current period. The balance of prepaid VAT after credit for the current period can be carried forward to the next period for credit. Normal VAT invoices for the payment received in advance before 30 April 2016 can be issued (if no business tax invoice has been issued), but issuance of special VAT invoices for such payment received in advance is not allowed. Small-scale VAT payers can apply with the in-charge tax authorities to issue special VAT invoices on their behalf if the special VAT invoices are required by the buyers. No special VAT invoices are allowed to be issued to individuals. In case you have questions or for further information, please contact the author of this newsletter: Gilbert Shen Senior Associate Head of Tax Practice Area Group CMS, China T +86 21 6289 6363 F +86 21 6289 0731 E gilbert.shen@cmslegal.cn
