Notice regarding several VAT issues related to international freight forwarding services (“Notice  No. 42”) (关于国际货物运输代理服务有关增值税问题的公告), issued by the State Administration of Taxation (“SAT”)
The SAT released SAT Announcement  No. 42 (“Announcement 42”) on 4 July, 2014, clarifying several VAT issues related to the indirect provision of international freight forwarding services by taxpayers under VAT pilot arrangements (“pilot taxpayers”).
Key features of Notice 42:
- Pilot taxpayers that, through other agents, indirectly deal with matters related to cargo and shipping services (international cargo transportation matters, port entry and exit of vehicles for international transportation, arranging for the piloting, berthing, loading and unloading) for consignors (“second forwarders”) will be exempt from VAT under Item 14 of Article 1 of Appendix III (transitional policies for VAT pilot arrangements) of Caishui  No. 106 (“Circular 106”).
- Requirements to apply for exemption: If pilot taxpayers provide international freight forwarding services, all agency fees received from consignors and paid to other agents must be settled through financial institutions. Announcement 42 also applies to pilot taxpayers that provide freight forwarding agency services for goods transported between Mainland China and Hong Kong/Macao/Taiwan.
Under Circular 106, only pilot taxpayers directly providing international freight forwarding services (“first forwarders”) can benefit from the VAT exemption regime. Second forwarders are not eligible for the VAT exemption and their VAT burden consequently increased since the enforcement of VAT pilot arrangements. Announcement 42 expands the VAT exemption treatment also to second forwarders with effects as of September 1, 2014, following the interpretation of the Ministry of Finance. However, the net basis policy is still limited to first forwarders. Date of issue: July 4, 2014. Date of effectiveness: September 1, 2014.