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VAT Credit Treatment Clarified for Asset Restructuring
Recently, a new policy (Announcement 55) has been issued to clarify this grey area. Effective from 1 January 2013, Announcement 55 provides guidance and clarification on the VAT credit treatment in certain asset restructuring.Taxand China explores the effect that this clarification will have on businesses.
Background: Announcement 13
Before Announcement 55, the latest Chinese tax regulation regarding VAT treatment of asset restructuring cases was Announcement 13, which states that:
- Where a taxpayer transfers all or part of its physical assets and debt-claims, debts and labour force related thereto to other entities or individuals through merger, division, sale and replacement in the course of asset restructuring, such transfer shall not be subject to VAT, and value-added tax shall not be levied for the transfer of goods involved therein.
Announcement 13 clearly details that the asset transfers that satisfy the required conditions listed above, are not subject to VAT liabilities. On the credit side, however, Announcement 13 does not discuss the one important implication of the input VAT credit related to the same assets: Is the input VAT only deductible by the assignor, or is it allowed to be carried over to the assignee?
Under different local tax practice, the above question has resulted in different tax treatments on the input VAT deductibility. Some tax bureaus have allowed the input VAT to be carried over to the assignee; while others have compulsorily required the input VAT to stay with the assignors. Accordingly, for those assignors who transferred all assets and did not have a sufficient VAT payable balance before the restructuring, the relevant input VAT cost will not be able to be utilised/recovered due to the fact that the input VAT in China is only creditable but not refundable.
Now: Announcement 55
The Chinese tax authority took note of the question discussed above and updated Announcement 55, issued on 13 December 2012 as follows:
- During the process of assets restructuring, where a general VAT taxpayer (Original Taxpayer) assigns all of its assets, liabilities and labor force together to any other general VAT taxpayer (New Taxpayer), and conducts its tax deregistration according to required procedures, the input tax that has not been offset before its tax deregistration may be carried over to the New Taxpayer for offsetting.
Announcement 55 has set up two conditions to allow input VAT to be carried over, both of which must be met:
(a) All of the assignor's assets, liabilities and labour force shall be assigned
(b) Tax deregistration of assignor is in process
Announcement 55 also provides details on the Standard Application Forms and formalities of the carry over procedure for implementation stage.
As a supplementary rule to Announcement 13, Announcement 55 provides important clarifications on the Chinese indirect tax implications in asset restructuring. But, some of the outstanding questions still have not been clarified clearly, such as:
- Whether Announcement 55 will also be applicable to those restructuring cases legally completed before 1 January 2013
- Comparing to full transfer, whether partial transfer will then be compulsorily required to absorb the VAT input cost within the assignor, or if it is still for local jurisdictions to decide
The outstanding queries may further be clarified in updates to the Chinese tax rules in the future.
There appears to be a trend to implement changes, to encourage mergers and restructuring in China, and Announcement 55 is a part of this. Recently, there have been important internal discussions among various central Chinese authorities regarding the upgrade of all rules (including tax rules) relating to M&A. Although these official details are not finalised yet, we believe these updates will be beneficial for Chinese companies. We recommend businesses follow the updates to the new Chinese restructuring rules.