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Chinese VAT Pilot Programme continues to improve cross-border VAT exemption regime
This is a welcome update to the guidance, particularly in its clarification of a number of practical issues. Before this, the first state policy mentioning such VAT exemption was CaiShui  No.131 (Circular 131) in late 2011, but there have not been any available implementation rules until this new Bulletin 52. Local tax bureaus such as Beijing and Shanghai have begun to introduce local guidance (for example Shanghai has issued Bulletin 2013 No.3 “SH Bulletin 3”) based on the release of bulletin 52.
Historically, Chinese service providers have found it difficult and risky to apply for VAT exemption in respect of rendering cross-border services, despite theoretically qualifying under the terms of Circular 131.
Under Bulletin 52’s VAT exemption treatment, no output VAT is payable but the input VAT incurred on costs is not recoverable. Although less beneficial than zero-rated VAT treatment, under which the input VAT incurred on cost is recoverable, VAT exemption is still considered as an incentive to promote the development of cross-border services in China.
What’s helpful in Bulletin 52
Bulletin 52 provides improved detail regarding the scope of cross-border services, application requirements, application materials and retroactive adjustments. The bulletin details the criteria to determine when taxpayers are providing qualifying cross-border services, for example. Exemptions are highlighted as permitted provided that all of the following criteria are met:
- Written cross-border services contracts are required
- For cross-border services provided to foreign recipients, taxpayers are to receive income from outside China
- Taxpayers are to separately compute the sales amount of their cross-border services and accurately compute the non-creditable input VAT. Taxpayers are not allowed to issue general VAT invoices for such exempt sales
The application for the VAT exemption must include the following documents:
- VAT application: three forms for contract registration, debit notes record filing and VAT exemption, respectively
- service contract
Depending on the nature of the services, some service providers must prove that the services are not delivered in China. Service providers must submit evidence that the service recipient is located overseas. Where overseas status is challenged, the tax bureau may require an overseas third-party notarisation statement
Good or bad news in local practice?
Local tax bureaus such as Beijing and Shanghai have begun to introduce local guidance (for example Shanghai has issued Bulletin 2013 No.3 “SH Bulletin 3”) based on the release of Bulletin 52.
Compared with Bulletin 52, SH Bulletin 3 provides more details on local practice focusing on VAT exemption/clearance filing for cross-border taxable services. Beyond the general regulations of Bulletin 52, SH Bulletin 3 provides further details on the following items:
- Bulletin 3 applies retroactively from 1 January 2012 and also applies to those during the period in which the VAT exemption had not yet been applied
- For the framework contract without service price, the date of payment, and the payment method, the taxpayer must also provide evidence of the performance of the contract, such as relevant orders and other relevant contract documents (such as time cost breakdowns with timesheet). The taxpayer must register the actual performance of the contract under the framework contract with the competent tax authorities on a monthly basis.
- Bulletin 3 emphasises that, if the competent tax authorities find that cross-border services circumstances are not compliant with the VAT exemption regime, the VAT exemption already enjoyed should be adjusted in accordance with the relevant provisions of the Tax Administration Law of the People's Republic of China. If tax evasion is suspected, the tax bureau will investigate and issue further penalties accordingly.
- For services where the receipts are necessarily overseas, bank statements and accounting vouchers to obtain revenue from overseas must be provided
From November 2013, the VAT for cross-border services cannot be exempted unless record filing for VAT exemption is conducted. Record filing must be done before the VAT filing for the period (normally the 15th of the following month). It will take around 14 working days for the competent tax authority to review and approve the record filing application.
In the meantime it also creates a dilemma in tax practice, mainly due to the unreasonably tight timeline described above. Problems may arise for taxpayers in cases such as the following:
- Recording filing before the 15th of each following month may not be feasible for some taxpayers. One example would be where the taxpayer fails to receive the payment from the client within such a short period (which is understandable), so no bank receipt supporting the payment would be available for the application.
- If the taxpayer assumes that it has exemption status when filing, and later finds that it has not been approved, whether potential late payment surcharges will be imposed is not clear
- In cases where the deadline cannot be met, some taxpayers may choose to prudently pay the VAT first. However, if they subsequently obtain approval for the VAT exemption, a refund of the VAT overpaid is not guaranteed by the current rules
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Generally, the updates to the policies at both state and local levels provide tax benefits to taxpayers. For example, the VAT refund for January 2012 through October 2013 offers significant tax savings to some taxpayers.
Still, the current VAT exemption regimes on cross-border services are not mature enough for taxpayers to follow them and it is likely that this will become an issue in the upcoming months. It is hoped that SAT will consider further updates to rectify the regrettable situation that China’s cross-border service companies find themselves in, and multinationals should continue to monitor these changes.
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