The general position in China is that separate VAT filing and payment obligations exist for each branch and head office of a legal entity in China. This can mean that a single legal entity in China may have multiple VAT filing and payment obligations across a range of different cities and provinces. Each city or province may also impose different administrative requirements, and adopt their own interpretation of the VAT rules, often resulting in significant additional compliance costs for businesses, particularly for large multinational companies (MNCs).
Circular 84 currently only allows taxpayers subject to the VAT pilot program to group for VAT purposes. This means that it applies to the transportation and modern services industries where the VAT reform process is currently in operation. However, it is expected that the VAT pilot program will shortly be expanded to other industries, so as time progresses, the application of Circular 84 will increase.
The specific implementation rules under which this framework will be operational at an administrative level are yet to be introduced (except in respect of the airline industry). However, with the release of the framework rules, businesses subject to the VAT pilot program can begin to consider whether they will group for VAT purposes. Approval will then need to be sought from the MoF and the SAT.
Circular 84 will be a welcome relief to companies with multiple branches across China for the following reasons.
- It will allow businesses with branches that have excess input VAT credits to apply those credits against the VAT payable of other branches. Excess input VAT credit balances are not generally refundable in China. This provides a powerful means by which to overcome problems of ‘wasted’ VAT credit balances in underperforming or new branches.
- It overcomes the need to prepare VAT returns for each branch. While payment obligations still continue for each branch, the calculation method for those branches is very simple.
- It overcomes many of the difficulties in having to deal with tax officials in different locations adopting a different interpretation of substantive provisions.
- Businesses wishing to exercise greater oversight of the VAT compliance of their branches, may wish to group as a means of achieving more transparency and stronger tax controls.
Circular 84 does have several limitations, which we envisage will be addressed in the future, specifically the following.
- Grouping only applies to the branches and head office of a single legal entity. Separate legal entities, including wholly owned subsidiaries, are not permitted to group with the head company for VAT purposes.
- Circular 84 currently only allows for grouping of those services subject to the VAT pilot program. It is hoped that once the VAT pilot program has been extended to all industries that more broadly based implementation rules will be enacted.