Notice regarding several VAT issues related to international freight forwarding  services (“Notice [2014] 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 [2014] 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:

  1. 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  [2013] No. 106 (“Circular 106”).
  2. 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.