As outlined in the 2019 Work Report from the Two Sessions meeting in March, the People’s Republic of China’s Ministry of Finance, along with the State Taxation Administration and General Administration of Customs, has announced new policies (as well as implementation details) for its Value Added Tax regime. The new VAT policies closely follow OECD guidelines on cross border neutrality and reduce tax rates for businesses in order to counteract slowing growth and trade war pressures while boosting economic productivity. The new VAT rates reflect a broader economic stimulus initiative that includes corporate tax reductions, special purpose bonds to fund infrastructure projects and reductions in the reserve requirement ratio for banks, in order encourage lending.
As of April 1st, 2019, the standard VAT rate was reduced from 16% to 13% (general sales and imports, processing and repair services, leasing tangible assets) while the rates for specified sales and imports, transportation, basic telecoms construction and leasing/sales of immovable property were reduced from 10% to 9%. The 6% rate for value added telecoms services, financial services and lifestyle services and intangible asset sales remains unchanged. Invoices from March 31st 2019 and earlier will generally be subject to the old rates.
There are several major policy changes that require businesses to take adaptive steps. These include refunds for excess input VAT credits, changes to export refund rates, additional deductions for selected industries, and providing VAT credits for the use of transportation services.
Taxpayers with an A or B tax credit rating are now eligible to claim refunds on excess input VAT credits instead of carrying forward the surplus amounts to offset against future tax bills. Claims are subject to a number of conditions, including VAT credit balance growth for six consecutive months, an increase of at least 500,000 RMB in the credit balance, making claims through eligible certificates and platforms, no overlap with other tax refunds and no record of penalties for three years before the claim.
Exports previously taxed at the 16% and 10% rates will now be taxed at 13% and 9%, depending on the industry. Agricultural products purchased for production or processing will be subject to input VAT with a 10% deduction, down from the previous rate of 13%.
Suppliers might not be able to claim input VAT credits for the cost of materials and will have to calculate the eligible refunds by checking rates set by Customs.
VAT refund rates generally reflect government incentives for promoted industries, which enjoy better rates than manufacturing operations that contribute to pollution.
Enterprises that operate in postal services, telecommunications, ‘modern services’ (R&D, IT, culture, art, radio, film, consulting and business support) and ‘lifestyle services’ (sports, education, healthcare, F&B, hospitality, travel) are eligible for extra deductions from their VAT taxes. Qualifying enterprises can increase their input VAT credits by 10%, subject to certain conditions, including that applicants for the deduction generate more 50% of their total sales in these sectors. Manufacturers, wholesalers and retailers are not eligible for this deduction.
Companies that make use of transportation services can now claim Input VAT credits for expenditures on domestic flight, train, road, water transit services at the 9% rate. Companies that register as VAT taxpayers will have to obtain transportation-specific VAT invoices for work-related travel expenses for their employees. The formulae for calculating transportation input VAT credits are as follows:
| Domestic Flights | (Ticket price + Fuel surcharge) / 1.09 * 9% |
| Railway | Ticket price / 1.09 X 9% |
| Road and water transport | Ticket price / 1.03 X 3% |
Companies should adjust their travel expense reimbursement policies in order to ensure they can properly claim VAT credits.
All businesses and enterprises operating in mainland China should evaluate the effects of the new VAT policies and adjust their tax strategy accordingly. Expenses should be recorded with electronic input VAT invoices wherever applicable. All sales contracts, purchase orders and all operations expenditures should be digitally recorded in order to streamline the accounting process and expedite claims and rebates. Companies should also check which deductions, refunds and input VAT credits they are eligible for under the new rules. The government has also issued rules on generating VAT invoices filing VAT returns, which also calls for a process review in order to ensure compliance.
Should you have any enquiries about the new VAT policies, filing procedures or eligible refunds or credits, please don’t hesitate to contact our tax services team. We have worked with clients in Hong Kong and China for decades, and our team can prepare and file corporate tax returns and help liaise with tax bureaus. Whether you are new to China or looking to overhaul your operations, we can walk you through every aspect of PRC tax compliance, from Enterprise Income Tax and Value Added Tax to local policies and surcharges all over the country.