On 4 July 2014, the SAT issued SAT Bulletin  No. 42 (“Bulletin 42”) to expand the VAT exemption to second-tier international freight forwarding companies. Bulletin 42 took effect from 1 September 2014.
As background, in the December 2013 issue of our China Tax Monthly, we reported that under Cai Shui  No. 106 (“Circular 106”), international freight forwarding services are exempt from VAT during an undefined transitional period as long as all the settlements are done via financial institutions. However, under Circular 106, only first-tier international freight forwarding companies are exempt from VAT. First-tier international freight forwarding companies are those freight forwarding companies that conduct business as an agent on behalf of principals and directly handle international transportation businesses and related businesses with international transportation carriers.
Now Bulletin 42 expands the VAT exemption under Circular 106 to second-tier international freight forwarding companies. According to Bulletin 42, second-tier international freight forwarding companies refer to VAT taxpayers who indirectly handle procedures related to goods and shipping agency (e.g., procedures for international transportation of goods, procedures for means of transportation used in international transportation entering and leaving port, and procedures for communicating and arranging pilotage, mooring, loading and unloading) for the entrusting party through other agents.
It is expected that Bulletin 42 will eliminate the unequal tax treatment of the first-tier international freight forwarding companies and the second-tier freight forwarding companies.