Scope and rates
There are three main forms of indirect taxes in China - a VAT, a business tax ("BT") and a consumption tax ("CT"). Indirect taxes in mainland China are currently subject to significant reforms and therefore this information may be outdated very quickly.
VAT currently applies to the sale of goods, the importation of goods, and the provision of repair, replacement and processing services in China. VAT in China exhibits some of the features of other VAT regimes throughout the world (albeit with some uniquely Chinese characteristics), in the sense that it taxes final private consumption expenditure (as well as some public expenditure), by generally relieving the burden of VAT on transactions between businesses through the input tax credit mechanism.
CT applies to the manufacturing, processing, importation or selling of 14 different kinds of goods in China, principally luxury goods.
BT applies to the provision of all other services, the transfer of intangible assets and the sale of immovable property. BT is a type of turnover tax - it is not creditable and therefore cascades throughout a supply chain. It can also apply to both the export and import of services.
In 2012 the Chinese Government embarked upon extensive indirect tax reforms. The reforms introduced a VAT pilot program which replaces BT with VAT for the transportation, asset leasing and modern services sectors. ‘Modern services’ includes research and development and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification and consulting services and will be expanded to also include radio, film and television from 1 August 2013. It has been foreshadowed that the VAT pilot program will be expanded to other industries beginning in the latter half of 2013.
The VAT pilot program currently applies in Shanghai (from 1 January 2012), Beijing (from 1 September 2012), Jiangsu and Anhui (from 1 October 2012), Fujian and Guangdong (from 1 November 2012) and Tianjin, Zhejiang and Hubei (from 1 December 2012) and will be expanded nationwide on 1 August 2013. It is expected that by the end of 2014, BT will have been replaced by VAT for all services sectors, eventually resulting in VAT applying to all goods and services in China.
The VAT, BT and CT comments in this fact file relate to mainland China only, and do not include the Special Administrative Regions of Hong Kong and Macau. Given that indirect taxes in China are subject to significant reforms, we recommend you contact a KPMG China advisor for the most up to date advice.
The standard rate of VAT is 17 percent for general VAT taxpayers.
VAT also applies at the rate of 17 percent for asset leasing, 11 percent for transportation services and 6 percent for modern services which are subject to the VAT pilot program.
The rate of BT generally ranges from 3 to 5 percent, although the exception is entertainment services which can be as high as 20 percent.
CT rates differ depending upon the stage of production at which the sale occurs, type, weight, or capacity. Given the application of CT is both limited and specific to the type of goods being sold, it is not proposed to discuss CT further.
In terms of VAT, the following are the main examples of exemptions and reduced rates:
- a narrow range of goods are exempt from VAT, including agricultural products, contraceptive drugs and devices, antique books, and other items declared by the State Council as being exempt
- exports of certain services under the VAT pilot program
- 'small scale taxpayers', being those without sophisticated business, accounting and auditing systems, and whose turnover is below certain thresholds (ranging from RMB 500,000 to RMB 800,000 of annual turnover, and RMB 5,000,000 for businesses which are subject to the VAT pilot program) pay VAT at the rate of 3% and are ineligible for input tax credits on purchases.
- a reduced rate of 13% applies to the sale of food grains and vegetable oils, heating, air-conditioning, certain gas supplies, books, newspapers and magazines.
The main category of zero rated goods is exports (discussed below further). However, unlike in many other countries, the refund provided on zero rated goods is, in many cases, less than the amount of VAT paid.
In relation to BT, the main exemptions are for:
- services subject to the VAT pilot program (currently transportation, tangible and movable asset leasing and modern services) so as to avoid double tax
- services provided by employees to their employers
- waste disposal services
- certain other services which are specifically exempt (e.g. nursing services, medical services, educational services)
- certain offshore outsourcing services and technology transfers
Generally, BT applies to the turnover of a business - however, for certain types of transactions, tax is payable on the "margin" (for example, foreign currency trading).
Other indirect taxes include:
- customs duty
- stamp duty
- various local levies, such as the Urban Maintenance & Construction Tax and Education Levy
- various real estate specific taxes, motor vehicle taxes and mining specific taxes.
There are two separate concepts relevant here - thresholds for liability for VAT purposes, and the separate threshold for registration as a "small scale taxpayer" or "general VAT taxpayer".
The VAT thresholds for liability apply only to individuals. Businesses and other "units" automatically have VAT liabilities on their taxable transactions, irrespective of turnover. However, even for individuals, the thresholds are very low - ranging from RMB5,000-20,000 per month of sales, or RMB300-500 per transaction in the majority of provinces in China .
"Small scale taxpayers" are those with turnover of annual sales of not more than:
- RMB 800,000; or
- RMB 500,000 if engaged solely or mainly in the production of goods or provision of taxable services not subject to the VAT pilot program; or
- RMB 5 million if providing services which are subject to the VAT pilot program.
Registration as a "small scale taxpayer" or "general taxpayer" determines whether:
- VAT is payable at 3 percent, with no eligibility for input tax credits on purchases (small scale taxpayers) and no eligibility to issue VAT invoices or
- VAT is payable in the usual way with input tax credits generally available for business purchases.
It is possible for taxpayers that would otherwise be "small scale taxpayers" to register as "general VAT taxpayers". They need to demonstrate a "sound accounting system" and provide accurate tax information, as well as having a fixed place of business in China.
For BT purposes, there is a threshold beneath which no BT liability arises. For individuals, the threshold is set very low – RMB300-500 per day where tax is paid on a transaction basis, or RMB5,000 to RMB20,000 per month where tax is paid on a fixed period basis. For businesses and all other types of units, there is no minimum threshold.
As noted above, the concept of registration for VAT purposes is, in practice, really more applicable to registration as a "general VAT taxpayer". General VAT taxpayers are required to register, by filing the form for the "Approbation of General Taxpayers of VAT" within 40 days after a tax period during which it was required to register. Separate procedures apply for "small scale taxpayers" in terms of the documentation which must be filed.
There are penalties for failing to register, which include fines which are a combination of interest and penalties, fixed dollar fines. The tax authorities have the capacity to revoke business licenses for failing to register.
No. Foreign companies often buy goods for export in Free Trade Zones as a means of avoiding irrecoverable VAT.
Please note that the answer to this question depends, to a significant extent, on regulatory issues which impact on the way in which foreign companies can do business in China, not merely VAT or BT issues.
Where an overseas company provides services which are subject to BT or VAT (in the case of taxpayers subject to the VAT pilot program), and it does not have a trading establishment in China, its representative in China is the withholding agent. If the overseas company does not have an agent in China, then the purchaser is the withholding agent. This is particularly relevant where an overseas company without operations in China makes supplies subject to BT or VAT to another entity in China.
No, see above. If an overseas company has an agent in China, then the agent may be liable. Alternatively, the liability falls on the purchaser.
No - grouping of different legal entities is not possible in China.
Moreover, in many cases, branches or offices of the same legal entity may be required to separately account for transactions, particularly where they operate in different provinces.
A regulation has recently been issued which would allow branches of the same legal entity that are subject to the VAT pilot program to seek approval to group for VAT purposes. 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).
VAT returns must be submitted either every 1 day, 3 days, 5 days, 10 days, 15 days, 1 month or 1 quarter, depending on the taxpayer's activities. Likewise, BT returns must be submitted every 5 days, 10 days, 15 days, 1 month or 1 quarter.
While these timeframes may be imposed, in reality most taxpayers lodge either monthly or quarterly.
It is common practice that taxpayers in China convert any foreign exchange balances using the middle exchange rate published by the People's Bank of China either on the day the transaction is recognized for accounting purposes, or on the first day of the month in which the tax is paid on the transaction. Taxpayers are not entitled to switch methods within the course of a year.
No - only businesses registered as general VAT taxpayers are eligible to claim input tax credits for VAT purposes. Businesses must obtain a ‘special VAT invoice’ and take it to the tax authority for verification before an input VAT credit can be claimed.
BT is a turnover tax and therefore there is no BT recovery mechanism. However, for some industries, the revenue which is subject to BT is calculated on a 'net' basis.
For VAT purposes, there are a number of restrictions on the recovery of input tax credits, the most significant of which is that only general VAT taxpayers are potentially eligible to claim and that claim must be supported by special VAT invoices. Special VAT invoices are highly regulated in China. As such, assuming the taxpayer is a general VAT taxpayer and holds a special VAT invoice, then further restrictions include an inability to claim for:
- inputs related to activities subject to BT;
- inputs related to the simplified levy method of calculating VAT;
- inputs related to the sale of tax-exempt items;
- inputs related to group welfare activities (e.g. employee canteens and employee benefits);
- those for personal consumption; and
- inputs used in deriving extraordinary or abnormal losses.
For completeness, it should also be noted that many exports of goods do not result in full recovery of VAT - that is, there may be a leakage in export VAT recovery. For BT purposes, there is no concept of input tax recovery. There is a time limit of 180 days after the VAT liability arises within which the recipient can claim input tax credits on VAT invoices.
International supplies of goods and services
Exports of goods from all provinces in China, as well as those services subject to the VAT pilot program, are either treated as zero rated or exempt for VAT purposes.
The mechanics of the way zero rating is achieved may differ. For example, exports of goods by manufacturing companies, as well as the export of certain services (such as licensed international transportation services, research and development and design services) which are subject to the VAT pilot program, are subject to what is known as the Export, Credit, Refund method ("ECR method"). That is:
- exports are exempt from VAT;
- input tax on purchases used in exporting are first credited against output tax on domestic sales; and
- excess input tax is refunded to exporters.
Goods exported overseas by China based trading companies apply what is known as the Levy First, Refund Later ("LFRL method"). Under this method, the trading company pays VAT on the purchase, which is passed through by the local supplier. When it exports the products, it is not subject to output VAT on the export, and it can then claim part or all of the VAT on the purchase.
In addition to the above zero rating, many services which are exported that fall within the VAT pilot program are exempt from VAT, including:
- leasing of tangible movable property where the property is outside China
- unlicensed international transportation
- engineering and exploration services where the project or mineral resources are overseas
- technology transfer services
- technology consulting services
- energy management services
- software services
- circuit design and testing services
- business process management services
- convention and exhibition services outside China
- trademark and copyright transfer services
- intellectual property services
- advertising services where the advertisement is outside China
- warehousing services where the warehouse is outside China
- logistics and ancillary services
- certification, verification and consulting services.
Exports of services which are subject to the BT regime will not generally qualify for exemption. That is because BT applies if either the supplier, or the recipient of the service, is in China.
Imports of goods are subject to VAT. VAT is payable to Customs.
Services acquired from abroad will generally be subject to BT. This is on the basis that the recipient is in China. If the supplier has no trading establishment in China, then its agent in China pays the BT on behalf of the supplier. However, if the supplier also has no agent in China, then the recipient pays the BT.
Services which are subject to the VAT pilot program will be subject to VAT. If the supplier does not have a business establishment in China, then the withholding agent or recipient will pay VAT if they are established or reside in a city or province which has implemented the VAT pilot program. The recipient in these circumstances will generally be entitled to an input VAT credit if they are registered as a general VAT taxpayer, so that VAT is not a real cost, provided certain documentation requirements are met.
Yes. Special VAT invoices may only be issued by general VAT taxpayers, and even then, only through government issued and regulated anti-counterfeit electronic systems. Those special VAT invoices must contain certain information to be valid.
Special VAT invoices, known as "fapiaos", may only be issued by general VAT taxpayers, and even then, only through government issued and regulated anti-counterfeit electronic systems and on numbered invoicing paper (the system is known as ‘the Golden Tax System’).
To be valid, special VAT invoices must also comply with the following:
- all items in the invoice must be completed consistently with the terms of what was actually supplied
- letters in the VAT invoice must be legible and completed properly
- the invoice must be issued at the time the VAT liability arises.
Yes, but only on machines purchased from the tax authorities.
No. A business can only issue special VAT invoices "fapiaos" in Chinese Yuan/Renmimbi ("CNY" or "RMB").
Transfers of business
Yes, there is potentially relief available from VAT and BT. However, the concession in China is not as broad as the going concern concession applicable in many other countries.
Options to tax
Yes, there is an option to tax for VAT purposes - it is known as a tax exemption waiver. The tax exemption waiver is general in nature - that is, once waived it applies to all goods and services supplied by the unit, and to all of its customers for a minimum period of 3 years.
Head office and branch transactions
Transactions between a head office and its branch will generally be subject to VAT or BT.
A regulation has recently been issued which would allow the branches of a single legal entity that are subject to the VAT pilot program to group for VAT purposes, thereby excluding transactions between those branches from VAT. 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).
Currently in some specific industries, a head office and its branches may be eligible to report on a consolidated basis, such as occurs with certain merchandise retailers and service station operators. Even still, such branches may be subject to separate VAT and BT payment obligations.
Generally, no bad debt relief is available for VAT purposes. For BT purposes, some financial institutions have obtained bad debt relief on delinquent loans.
No. However, there are broadly applicable provisions which deal with transactions at less than market value, or an abnormal loss is derived.
The penalty and interest regime in China is designed to have a strong deterrent effect.
How often do tax audits take place?
Audits take place regularly. They tend to be carried out in the form of annual tax inspections targeting specific industries or entities, self-inspections and random audits.
Are there audits done electronically in your country (e-audit)? If so, what system is in use?
No, e-audits are not generally used.
Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?
No. However, the Chinese tax authorities are considering implementing an advance tax rulings system by way of a pilot program. The pilot program is initially expected to be limited to large enterprises which have entered into Tax Compliance Agreements with the tax authorities.
Are rulings and decisions issued by the tax authorities publicly available in your country?
N/A for rulings. However, when the proposed advance tax rulings system is implemented it is expected that the rulings will be published on the State Administration of Taxation's website (without disclosing the taxpayer's identity or confidential information).
Yes, there are a significant number of special indirect tax rules in China which differ from standard indirect tax rules. Many of these rules arise from the fact that the indirect tax system is often used as a means of carrying out the government's economic and trade policies.
Generally no, however, the government from time-to-time does introduce various exemptions or concessions with a limited time span. For example, an exemption from BT for certain outsourcing services for the period to 31 December 2013. Some large companies have historically negotiated to receive reduced BT or VAT liabilities when setting up in a new province or district, but these arrangements are now occurring less commonly (other subsidies may be available instead).