The Shanghai Finance Bureau, the Shanghai State Tax Bureau and the Shanghai Local Tax Bureau jointly issued Hu Cai Shui [2012] No. 5 ("Notice 5") to provide subsidies to the enterprises that suffer an increased tax burden due to the change from business tax to VAT in the pilot program.

The enterprises seeking subsidies should report the increased tax burden to the competent tax bureau on a monthly basis when filing VAT returns. Details of the application, review and approval procedures and how the subsidies will be paid will be clarified later.

VAT grouping policy

Generally speaking, each branch of a company is considered a separate VAT taxpayer. On paper, the Provisional Regulations on Value-added Tax allow consolidated VAT filings amongst branches upon approval by the China's Ministry of Finance (MOF) and China's State Administration of Taxation (SAT) or other agencies authorised by the MOF and the SAT. However, this VAT grouping policy had not been implemented in practice until Cai Shui [2012] No. 9 ("Notice 9") was issued jointly by the MOF and the SAT in January 2012.

Notice 9 allows branches located in the same province to file consolidated VAT returns upon the approval of the provincial level state tax bureau and the finance bureau. The approval must be recorded with the SAT and the MOF.

VAT policy on sale of used fixed assets

The SAT issued the SAT Bulletin [2012] No. 1 ("Bulletin 1") to clarify situations where the sale of used fixed assets by general VAT taxpayers qualify for the simplified VAT calculation method, i.e., 4 percent VAT with 50 percent reduction but no input VAT credit.

Cai Shui [2009] No. 9 issued in 2009 allowed general VAT taxpayers to use the simplified VAT calculation method in the following two situations:

  • selling used fixed assets used exclusively for non-VATable or VAT exempt projects, group benefit or personal consumption; and
  • selling used fixed assets purchased prior to 31 December 2008 used for VATable purposes or combined VATable and other purposes.

However, the 2009 notice did not cover all potential situations where general VAT taxpayers could not use input VAT credits incurred when purchasing of the fixed assets.

Bulletin 1 is more comprehensive and allows general VAT taxpayers to apply the 4 percent nominal VAT rate and the 50 percent reduction in the following two situations:

  • selling used fixed assets purchased before the general VAT taxpayer was certified as a general VAT taxpayer; and
  • selling used fixed assets for which input credits have not been used and are not allowed to be used under the law.

Bulletin 1 is effective as of 1 February 2012.

VAT refund for the animation industry

Cai Shui [2011] No.119 ("Notice 119"), jointly issued by the SAT and the MOF, extended the VAT refund incentive to software and integrated circuit industries to certified animation companies selling its own developed animation software.

The effective VAT rate for general VAT taxpayers selling its own developed animation software has been changed to 3 percent, using a refund after collection method. The tax is still collected at the standard rate of 17 percent, and any tax liabilities in excess of 3 percent of the sales value of the software products are refunded to the taxpayers.

In addition to the VAT refund, Notice 119 also provides business tax incentives to all types of relevant services in the animation industry, such as design, production and copyright transfers. These services are also subject to a reduced 3 percent business tax rate.

The VAT and business tax incentives are effective for two years starting from 1 January 2011.