Given the distinct nature of the oil-and-gas industry in China, special fiscal and tax policies have applied with respect to foreign contractors over the years. An example of this is that foreign contractors have been subject to business tax at the rate of 3% or 5%, based on the type of services provided.
Under China’s current tax regime, the term “foreign contractors” generally refers to foreign enterprises engaged in engineering or provision of labor services for exploration and development of natural resources—such as oil and gas—in China.
VAT pilot program
Between 1 January 2012 and 31 December 2012, the value added tax (VAT) pilot program was rolled out to 11 cities / provinces. The VAT pilot program replaces China’s business tax with VAT.
Most foreign contractors who provide labor services for cooperative exploitation of oil and gas pay relevant indirect taxes to the “offshore oil tax bureau”—some of which are located in VAT pilot locations. In addition, some foreign contractors providing services for onshore oil and gas projects also pay indirect taxes in the VAT pilot locations.
China’s State Council announced earlier this month that the VAT pilot program is being expanded nationwide, beginning from 1 August 2013.
With the expansion of the VAT pilot program, foreign contractors may need to clarify whether the VAT pilot program applies to them and how this application would be achieved.
Under the VAT plan, offshore oil exploitation and cooperative development of offshore oil-and-gas resources may possibly be incorporated into the existing collection and management mechanism that applies for standard VAT payers. However, during the transitional period, a question remains as to how to balance the indirect tax burden and mitigate the compliance risk for foreign contractors.
Read an April 2013 report [PDF 348 KB] prepared by the KPMG member firm in China: Uncertainty on the application of VAT pilot regime to foreign contractors