On December 15, 2008, the Ministry of Finance (MOF) and the State Administration for Taxation (SAT) promulgated the newly-revised Detailed Implementation Rules for the Provisional Regulations on Value-Added Tax of the PRC (MOF & SAT Order (2008) 50, the New VAT Rules). The New VAT Rules took effect on January 1, 2009.
The New VAT Rules revise several provisions of the current Detailed Implementation Rules for the Provisional Regulations on Value-Added Tax of the PRC (the Old VAT Rules), which were promulgated in 1993. The major revisions reflect: (1) the transformation of the value-added tax (VAT) from “production-based” to “consumption-based”; (2) the need to be consistent with the newly-revised Detailed Implementation Rules for the Provisional Regulations on Business Tax of the PRC; and (3) the further adjustment of the mechanism for small-scale VAT taxpayers.
The New VAT Rules define the fixed assets that are eligible for input VAT credit as “machines, mechanisms, transportation vehicles and other equipment, tools, apparatuses and so on relevant to production and operation and with a life span of more than 12 months.” The New VAT Rules further clarify that immovable properties (e.g., buildings, structures and other attachments to land) do not fall within this definition. In addition, the input VAT on fixed assets (e.g., motorcycles, cars and yachts) that are subject to consumption tax and used by taxpayers themselves cannot be credited against such taxpayers’ output VAT. If certain fixed assets are used in VAT taxable items and also used in non-VAT taxable items, VAT exemption items, collective welfare or personal consumption, such fixed assets are still eligible for input VAT credit.
To be consistent with the New BT Rules, the New VAT Rules revise the provisions regarding mixed sales and a taxpayer’s engagement in both VAT taxable activities and BT taxable activities.
The New VAT Rules do not change the standard of “principal business” that is currently used to deal with mixed sales. According to this standard, whether a taxpayer is subject to VAT or BT is determined by such taxpayer’s principal business. “Mixed sale” is different from “engagement in both VAT taxable activities and BT payable activities.” A “mixed sale” refers to a single transaction that involves both goods (e.g., the sale of a TV set) and non-VAT taxable services (e.g., the installment of such TV set). In contrast, under the concept of “engagement in both VAT taxable activities and BT payable activities,” the VAT taxable activities and the BT payable activities do not occur in one transaction.
Due to the particularity of the mixed sales in relation to the construction business, the New VAT Rules adopt a special rule from a former tax circular to deal with this type of mixed sales. The rule provides that, if a taxpayer sells self-manufactured goods and concurrently provides construction services, the taxpayer should separately account for the sale of goods and the turnover of the non-VAT taxable services, and pay VAT based on the sale of goods and BT based on the turnover of such services. The rule also states that if the taxpayer fails to account for the transactions separately, the taxation authority has power to determine the sales amount of goods subject to VAT.
Under the Old VAT Rules, if a taxpayer engages in both VAT taxable activities and BT taxable activities but fails to separately account for these two types of businesses, the taxpayer should pay VAT for all such businesses, unless the taxation authority decides otherwise. However, under the New VAT Rules, the taxpayer should pay VAT and BT based on the taxation authority’s determination of the sales amount of goods (together with VAT taxable services) and the BT taxable turnover, respectively.
The New VAT Rules further adjust the small-scale VAT taxpayer mechanism by: (1) lowering the cap (of sales of goods) for industrial small-scale taxpayers from RMB 1,000,000 per annum to RMB 500,000 per annum, and lowering the cap (of sales of goods) for retail/trade small-scale taxpayers from RMB 1,800,000 per annum to RMB 800,000 per annum; (2) allowing certain types of VAT taxpayers (i.e., non-enterprise entities, and enterprises without frequent VAT taxable activities, each with a VAT taxable sales amount exceeding the above cap) to choose to be small-scale VAT taxpayers, rather than uniformly classifying them as small-scale VAT taxpayers as the Old VAT Rules did.
In addition to the above adjustments, the New VAT Rules also (1) narrow the scope of abnormal losses by removing “losses due to natural disasters” and “other abnormal losses” from the definition of “abnormal losses”; (2) introduce a new method—using the average sale price of similar goods sold by other taxpayers in the most recent period—for the taxation authority to determine the sales amount when such authority thinks the sales amount claimed by a VAT taxpayer is obviously and unjustifiably low or when other prescribed situations occur; (3) raise the VAT threshold; and (4) revise a few other provisions