At the second session of the 13th National People's Congress on 5 March 2019, Chinese Premier Li Keqiang announced that China will reform its value-added tax regime to reduce the VAT burden on taxpayers. Following this announcement, the Ministry of Finance (MOF), State Taxation Administration (STA), and the General Administration of Customs released several notices in order to implement this VAT reform.
Effective from 1 April 2019, China:
- reduces the current VAT rates on the sale of goods or immovable property, the provision of certain services and the importation of goods
- provides a 10% super deduction to companies operating in four specific service areas
- allows VAT refunds for increased excess input VAT credits
- allows full input VAT credits for purchases of real estate and projects under construction to be offset at one time
- allows input VAT credits for domestic passenger transportation services
This alert outlines each of the above-mentioned benefits and explains how taxpayers may qualify to benefit from them.
VAT rate reduction
Starting 1 April 2019, the 16% VAT rate has been reduced to 13% and the 10% VAT rate has been reduced to 9%.
The VAT reduction from 16% to 13% applies to:
- sale or import of goods
- provision of processing, repair and replacement services
- leasing of tangible movable property
The VAT reduction from 10% to 9% applies to:
- sale or import of agricultural products and certain life necessities
- provision of transportation, postal, basic telecommunications and construction services
- leasing or transfer of immovable property
The 16% VAT refund rate for qualified export of goods and services has also been decreased to 13%. Meanwhile, the 10% VAT refund rate for the qualified export of goods and services that were originally subject to the 10% VAT tax rate has decreased to 9%. The 10% VAT refund rate for qualified export of goods and services that were originally subject to the 16% VAT tax rate remains unchanged.
10% super deduction From 1 April 2019 to 31 December 2021, any company providing qualifying services can benefit from an extra 10% input VAT credit. To qualify for the extra VAT credit, more than 50% of the company's sales revenue must come from postal services, telecommunications services, modern services or consumer services.
VAT refund for increased excess input VAT credits
Unlike the majority of countries, which allow companies to claim VAT refunds for unused input VAT credits during the current period, China has generally only allowed such unused input VAT credits to be carried forward. As a result, this has led to cash flow issues for companies, particularly those with large input VAT credits. To provide relief, China started to allow qualified taxpayers in 18 industries to apply for VAT refunds during that period in 2018. On 1 April 2019, China expanded this VAT refund policy to all industries. A qualified company in any industry can receive a VAT refund for the increased excess input VAT credits during the current tax period. The "increased excess input VAT credits" are the amount of accumulated excess input VAT credits from the current tax period less the accumulated excess input VAT credits at the end of March 2019.
A company can only apply twice a year for a VAT refund on the increased excess input VAT credit. Since the VAT refund requires increased excess input VAT credits for six consecutive months, the first month that qualified companies could begin applying for VAT refunds for increased excess input VAT credits was October 2019.
In a Q&A session, the STA explained that the government will, for now, only allow companies to enjoy VAT refunds for increased excess input VAT credits so as not to financially stress government coffers. However, the government will gradually allow VAT refunds for the accumulated unused input VAT credits at the end of March 2019. If the government allows VAT refunds for these earlier unused input VAT credits, companies with large amounts of accumulated unused credits will see even greater cash flow benefits.
Starting from 1 June 2019, qualified advance manufacturing enterprises can receive a VAT refund for the increased excess input VAT credits. The qualified advance manufacturing enterprises are enterprises with more than 50% of their total sales volume generated from advanced manufacturing industries which include the production and sale of non-metallic mineral products, general equipment, special equipment and computers, communications and other electronic equipment.
Full input VAT credits for purchases of real estate and projects under construction can be offset at one time
Previously, if a company purchased real estate or projects under construction, it needed to stagger the offset of its input VAT credits on that purchase over two years: 60% of the input VAT credits in the first year and 40% in the second year. Starting from 1 April 2019, companies can offset these input VAT credits at one time. This policy allows companies to offset input VAT credits immediately when they purchase real estate or projects under construction.
Input VAT credits for domestic passenger transportation services
Starting from 1 April 2019, companies can obtain input VAT credits for domestic passenger transportation services with the appropriate supporting documents.
A company can only obtain input VAT credits in respect of domestic transportation services enjoyed by employees who have signed a labor contract with the company or are seconded to it. Furthermore, the VAT electronic ordinary invoice must be issued to the company, not the individual.
Companies can receive input VAT credit for rides which can provide VAT electronic ordinary invoices (for example, Didi). However, they cannot receive input VAT credits for taxi rides since taxi receipts, classified as "other roadway tickets," do not indicate passenger identity. We hope the tax authority will resolve this unequal treatment in later implementing rules.
To benefit from the input VAT credits, companies should establish reimbursement policies that require employees to obtain and submit the appropriate supporting documents to receive reimbursements from the company.
China has taken continuous steps towards reducing the VAT burden for taxpayers. On 1 May 2018, the 17% VAT rate was reduced to 16%, and the 11% VAT rate was reduced to 10%. On 1 April 2019, those rates were further reduced to 13% and 9% respectively. In order to effectively benefit from VAT changes, taxpayers should keep all supporting documentation necessary to prove their eligibility for such. Taxpayers should also remain alert to the issuance of fresh VAT regulations with new, additional benefits as China continues this trend towards an even more taxpayer-friendly VAT regime.