On 12 December 2013, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2013] No. 106 (“Circular 106”) to expand the VAT pilot program to cover railway transportation services, express delivery services and postal services. Circular 106 took effect on 1 January 2014. Circular 106 supersedes Cai Shui [2013] No. 37 (“Circular 37”) and restates much of the basic regulatory framework for the VAT pilot program.

Under Circular 106, the VAT rate for railway transportation services and postal services is 11%. The term “express delivery services” does not appear in Circular 106. Instead, “pick-up and delivery services” are included as a sub-category of the logistical support services, which are subject to a rate of 6%. Since Circular 106 was published, local tax bureaus in China have adopted a wide range of different interpretations about the taxation of pick-up and delivery services.

Some tax bureaus have adopted the view that express delivery services are covered by two different categories: transportation services and pick-up and delivery services. For express delivery services, activities involved in the transportation of letters and packages from one city to another city are categorized as transportation services, while activities involved in the pick-up and delivery of letters and packages within the same city are categorized as pick-up and delivery services. This interpretation poses practical difficulties, as it can be problematic for express delivery companies to split revenue between transportation services and pick-up and delivery services, as well as to issue invoices with different VAT rates (11 percent for transportation services and 6 percent for pick-up and delivery services). However, other tax bureaus have taken the view that the entire express delivery service should be treated as logistical support services applying a single rate of 6%. Further guidance will be needed from the Chinese tax authorities to provide a unified interpretation for all of China.

Another important change under Circular 106 is that the VAT burden for international freight forwarding services will significantly decrease. In the July/August/September 2013 issue of our China Tax Monthly, we reported that Circular 37 created a much higher VAT burden for international freight forwarding services because freight forwarders and shipping agents were subject to 6% VAT on the full charge to customers, including the international transportation fees paid to international carriers. Under Circular 106, international freight forwarding service providers will be entitled to deduct from total revenue the international transportation charges paid to international carriers. In addition, international freight forwarding services are exempt from VAT during an undefined transitional period as long as all the settlements are done via financial institutions. This exemption is retroactive to 1 August 2013 when the current arrangements first came into effect.

It is presently expected that the telecommunications sector will join the VAT pilot program by April 2014. Aside from the telecommunications sector, financial services and real estate services are the two main service sectors that have not yet been included in the VAT pilot program.