INSIGHT: China VAT Incentives to Help Business

April 1, 2020, 7:00 AM UTC

The Chinese Ministry of Finance (MOF) and State Taxation Administration (STA) issued several Circulars in February to provide tax incentives, including value-added tax (VAT) incentives, to help businesses affected by the Covid-19 outbreak. The VAT incentives include VAT exemptions for certain industries and exemption for donation of anti-epidemic goods as well as excess input VAT refund for manufacturers of anti-epidemic goods.

The STA extended the February monthly filing deadline from March 16, 2020 to March 23, 2020. Small and medium-sized enterprises can apply for a longer extension for tax filing and tax payment with local tax authorities.

On March 17, 2020, the MOF and STA raised the export VAT refund rates for 1,464 goods. The increase of export VAT refund rates is expected to reduce Chinese exporters’ costs.

Along with the VAT incentive package announced in March 2019, these incentives are intended to help taxpayers reduce their tax burden and improve cash flow.

New Rules

On February 1, 2020, the MOF and STA, together with the General Administration of Customs, issued Bulletin 6 to provide that imported goods used for the prevention and control of Covid-19 are exempted from import VAT, customs duty and consumption tax. Such goods include reagents, disinfection materials, protecting appliances, ambulances, epidemic control vehicles, disinfection vehicles and emergency command cars. If an importer has already paid import taxes on these imported goods they can claim a refund of the taxes (with the exception of import VAT that the importer has already claimed as input VAT).

On February 6, 2020, the MOF and STA issued Bulletin 8 to announce the following incentives:

  • manufacturers of key anti-epidemic goods can claim a one-off corporate income tax (CIT) deduction for purchase of additional equipment in order to enlarge manufacturing capacities;
  • manufacturers of key anti-epidemic goods can apply for full refund of excess input VAT (incremental excess input VAT compared with the end of December 2019) on a monthly basis;
  • VAT exemption for revenue derived from transportation of key anti-epidemic goods;
  • loss carry-forward period extended from five years to eight years for companies in transportation, catering, hotel and tourism sectors that have been serious impacted by the epidemic;
  • revenue generated from public transportation services, lifestyle services and courier delivery services is exempted from VAT (for details regarding services that fall into these categories, please refer to Caishui (Circular) (2016) No. 36 issued by the MOF and STA).

On February 6, 2020, the MOF and STA issued Bulletin 9 to provide tax incentives for the donation of anti-epidemic goods. Donation of anti-epidemic goods directly to hospitals or through public welfare organizations or government authorities is exempted from VAT, consumption tax, urban maintenance and construction tax, education surcharge and local surcharges.

In order to boost export business, the executive meeting of the State Council on March 10, 2020, made a decision to raise the export VAT refund rates for all goods to be same as their applicable VAT rates, except for those goods which are considered as high-polluting, high-energy-consuming or resource-intensive. On March 17, 2020, the MOF and STA issued Bulletin 15 to implement the decision. After this round of adjustment, there will be four export VAT refund rates: 13%, 9%, 6% and 0%. The new export VAT refund rates are effective from March 20, 2020.

Our Comments

The VAT exemptions announced are intended to reduce the tax burden of taxpayers. However, under the current rules, when a supply is VAT exempted, the input VAT incurred for the supply cannot be recovered. Therefore, the benefit of the VAT exemptions is limited.

As part of the VAT incentives effective from April 1, 2019, a new program was introduced to allow qualifying general VAT payers to claim a partial refund of excessive input VAT, i.e. the uncredited input VAT in excess of output VAT. This policy is seen as a positive development in the Chinese VAT rules. Unlike many other countries that allow a refund of excessive input VAT, previously Chinese VAT rules generally did not allow such a refund. Instead, the uncredited input VAT was only allowed to be carried forward to offset future output VAT. Such a mechanism created cash flow issues for enterprises, especially those with large initial capital investments and long construction cycles.

There are some conditions to be satisfied before a taxpayer can apply for this benefit; for example, starting from the VAT assessment period of April 2019, that the newly increased uncredited input VAT has been greater than zero for six consecutive months, and the amount of newly increased uncredited input VAT at the end of the six months is 500,000 yuan ($70,460) or more. There were also some limitations to the amount of refund that can be obtained; a maximum 60% of the incremental excess input VAT can be refunded.

Compared with the refund policy mentioned above, the newly announced excess input VAT refund for manufacturers of key anti-epidemic goods is more beneficial. There is no requirement to have incremental excess input VAT for six months. Instead, qualifying taxpayers can apply for refund of excess input VAT on a monthly basis (as long as there is incremental excess input VAT compared with the excess input VAT as of the end of December 2019). There is also no 60% limit on the refundable input VAT.

The excess input VAT refund policy is very positive progress in Chinese VAT reform. It is especially welcomed by taxpayers who have made large capital investments and suffer from cash flow pressure.

The tax authorities will review the input VAT of the company and if noncompliance is detected, the application may be put on hold. It is therefore suggested a business should review the refund basis and improve internal controls before application. Businesses can also properly organize purchasing and sales to meet the conditions for application at an earlier stage.

The increase of export VAT refund rates is the latest incentive announced. There are 1,464 goods for which export VAT refund rates are to be raised, representing about 16% of total HS (World Customs Organization Harmonized Standard) code items in the current Chinese tariff schedule; including 1,084 items for which rates are to be raised to 13% (e.g. certain silicon dioxide products and certain acyclic hydrocarbons whose current rate is 10%); and 380 items for which rates are to be raised to 9% (e.g. pork, beef, lamb, certain nuts and coffee products, whose current rate is 6%).

The rate adjustment may affect a broad range of sectors such as agriculture, animal husbandry, food processing, chemicals, plastic and rubber, paper, ceramics, iron and steel, non-ferrous metals. There are more than 620 organic chemical products for which refund rates would be raised.

Products that are already enjoying a full export VAT refund are not impacted. With the increased refund rates, the relevant exporters would be able to enjoy the full refund of the VAT incurred for the exported goods.

Planning Points

We suggest taxpayers should:

  • evaluate the potential impact of the increase of the export VAT refund rate and review pricing strategy;
  • negotiate with foreign buyers about export prices adjustment if necessary and commercially feasible;
  • arrange the export timing appropriately as the new rate would be applied to exports made on or after March 20, 2020, with the export date determined by the date shown on export customs declaration forms; and
  • consider whether to further optimize the overall business model with the increased refund rates.

Other Incentives

Super Deduction

Beside the newly announced VAT incentives, taxpayers can also review whether they have fully enjoyed the incentives announced in 2019.

The input VAT super deduction is an example. “Super deduction” means that in addition to the input VAT a general taxpayer can claim, an additional 10% of the input VAT can be credited. This applies to taxpayers who have had over 50% of their revenue attributable to the provision of postal services, telecom services, “modern services” (defined in Circular (2016) 36 as technical and intellectual services provided to the manufacturing, cultural and logistics sectors) and lifestyle services since April 1, 2019. The super deduction percentage has been increased to 15% for lifestyle service providers since October 1, 2019. The super deduction policy was introduced as a temporary policy which is valid until December 31, 2021.

The super deduction is a reduction in the cost of the taxpayer. Therefore, it has a direct impact on profit and loss. It also requires more compliance work from taxpayers. For example, taxpayers need to keep a separate record of the super deduction amount that has been claimed. In the event that some input VAT that has been credited becomes irrecoverable in future, the super deduction should be adjusted accordingly.

Taxpayers should review input VAT credit and irrecoverable input VAT to make sure they are in compliance. They also need to make sure they have VAT special invoices from vendors to support input VAT credit.

Businesses can also make some arrangements to fully utilize the benefits. For example, group companies can consider centralizing the qualified services in one legal entity so that the entity can meet the condition of over 50% revenue from qualified services.

Cross-Border Services

Taxpayers can also review the VAT treatment of cross-border services provided outside China. Such services are generally exempted from VAT or zero-rated, depending on which category the service falls into. For zero-rated services, input VAT can be refunded. For exempted services, the input VAT is not recoverable. Zero-rating is therefore more advantageous than exemption. However, the compliance requirement is much more cumbersome for zero-rating because cash refund is available. Taxpayers can therefore choose to give up the zero-rating treatment and select exemption.

To enjoy exemption or zero-rating, services need to be fully consumed outside of China, which means the service recipient should be outside of China, and the service should not be related to any goods or real property in China. Since there is no detailed implementation guidance, the local practice can be different from one city to another and even from one tax bureau to another.

It is important for Chinese service providers to obtain the exemption or zero-rating treatment for services they provide outside China. Otherwise, they will need to pay VAT on the services; if they cannot pass on the VAT to the overseas service recipient, they will need to bear the VAT cost and their profit will be reduced.

Planning Points

We suggest businesses review cross-border service contracts, evaluate the pros and cons of exemption and zero-rating treatment and make the optimal choice. They also need to understand local documentation and application requirements for exemption and zero-rating and properly manage the compliance accordingly.

Li Qun Gao is a Tax Partner with Deloitte China.

The author may be contacted at: ligao@deloitte.com.cn

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Learn more about Bloomberg Tax or Log In to keep reading:

Learn About Bloomberg Tax

From research to software to news, find what you need to stay ahead.

Already a subscriber?

Log in to keep reading or access research tools.