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VAT stepping into the telecommunications industry
The Chinese VAT pilot scheme is ever-growing. Railway transportation and postal services were added to the VAT scheme in January 2014 and in June 2014 the pilot scheme was expanded to cover the telecommunications sector. The telecom industry is quite a restricted sector in China as most of the companies are controlled by the Chinese Central Government. The biggest telecommunications corporations are China Telecom, China Unicom and China Mobile.
From a tax point of view, Circular 26 has classified telecommunications services into 2 areas:
- Basic telecom services
- Value-added telecom services
The applicable VAT rates are 11% and 6% respectively (under the previous business tax scheme, both were subject to 3% BT).
Basic telecom services include voice communication services, the sale or rental of bandwidth, wavelength and other network elements. The main reason for a higher applicable VAT rate for basic telecoms is due to the increasing amount of infrastructure investments resulting in the higher availability of deductible input VAT. Moving forward telecom companies should report their sales revenue on basic telecom services and value-added telecom services separately, even if they relate to the same transaction, so that the lower 6% can still be utilised, otherwise all revenues will be subject to the higher zone of 11% by default.
After 1 June 2014, if a Chinese company reports its telecom expenses without their telecom VAT invoices, theoretically such an expense would not be corporate tax deductible.
Other concerns in Circular 43
Circular 43 also introduced the following VAT implications:
- When telecom services are provided together with a gifted Integrated Circuit card or other telecom products, the price for the services and products shall be appointed their applicable VAT rate and then VAT will be calculated separately for each service / product
- When a telecom company receives donations on behalf of a qualified non-profit organisation via SMS etc the payment to the non-profit organisation can be deducted before calculating output VAT
- A company or individual in China provides telecom services to overseas is exempted from VAT
- The bonus points plan for telecom companies is not subject to VAT
In the current tax practice of point 1, the policy does not provide clear enough guidance on the quantification of services vs. products therefore until now a company could make their own decisions based on their own understanding, for example through Fair Market Value or on a cost basis.
Point 2 maintains the same calculation method of the BT scheme to protect taxpayers; there is no change on tax burden before and after the new rule.
Point 3 provides some new preferential treatment for scenarios where the service recipient is not in China, while it cancelled an old BT exemption for overseas companies/individuals providing international telecom services to China companies/individuals in an non-China area (Guo Shui Han 2010 No.30). It concludes that if a Chinese company/individual needs to make an overseas payment for the above service, the relevant Chinese VAT should be withhold by the payer and the withheld VAT will be a deductible input VAT for the payer. It should also be noted that as per the Chinese VAT rule, if VAT is exempted, the relevant input VAT should not be deductible.
Point 4 is also a new preferential policy when compared to the BT scheme, however, there is an unanswered implication: if the bonus points plan provides exchange goods which have a different applicable VAT rate compared to the original services, can VAT be fully waived for 100% of the value of the exchange goods? Currently there is no official answer to this, which may lead companies into tax risk.
Additionally, since pre-pay telephone cards are common in China and pre-pay card companies have allowed customers to 'use now, pay later', sellers may find it difficult to understand what VAT rate to apply at the time of purchase. Currently there is no official explanation on this either.
Considering the evolution of the VAT pilot scheme in past years it is expected that the unsolved grey areas mentioned within this article will be solved by a series of new updates soon.
The Chinese VAT pilot scheme is intended to completely replace BT with VAT in the future. The VAT deductible mechanism should be able to provide tax savings for telecom companies and consequently will benefit all individual/company consumers. There has been an official comment that the next steps for the VAT pilot scheme is to expand into industries of finance, construction, real estate etc. Companies should keep abreast of all developments of the VAT pilot scheme in order to ascertain any potential impact on their operations and to remain compliant.
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