Value Added Tax (VAT) Guidelines: China

Generally, sales of goods, provision of services, assignment of intangible goods and immovable properties are all subject to VAT obligation in China.

 

According to Chinese VAT regulations, the following transactions shall also be subject to VAT obligation:

 

The standard VAT rate is 13 percent (former 17 percent) which applies in sales of goods, provision of processing, repair and replacement services and importation of goods, while a reduced VAT rate 9 percent applies in sales of necessities (e.g. agricultural items, water gas, etc.) as well as assignment of immovable properties and land using rights. The provisions of services are also subject to VAT with the corresponding VAT rates listed as follows:

 

According to Chinese VAT regulations, export of goods from China and provision of cross-border transportation and R&D services, etc. attract a zero rate of VAT and may be entitled to a refund of VAT incurred in the impor­tation, purchase and production stages, which are known as “export VAT refund”. The refund rates range from 0 percent to 13 percent. On the other hand, the provision of some certain cross-border services could use the VAT exemption policy if the prescribed requirements are met.

Entities engaged in the businesses subject to VAT in China shall be registered as VAT payer. Depending on the annual sales revenue and sophistication of accounting system, applicants will be categorized as either General VAT payer or Small-scale VAT payer.

 

The annual sales amount criteria is RMB 5 million. Enterprises that have already been registered as General VAT payer are allowed to be re-registered as Small-scale VAT payer. The major differences in VAT treatment between the two categories of VAT payers are the VAT rates applied and whether Chinese input VAT can be credited or not by the taxpayers.

 

Normally, entrepreneurs conducting supplies subject to VAT in China are required to submit a monthly or quar­terly VAT return according to their business volume and the assessment of the competent tax authorities.

 

Monthly and quarterly VAT returns of most enterprises are filed electronically, which allows the competent tax authority to compare the data in the tax system and tax returns filed by the enterprises.

 

For entities, which meet the criteria to register as general VAT payer in China but fail to do that within the stipu­lated period, they will be required to pay output VAT incurred on their taxable supplies based on the corres­pon­ding stipulated VAT rate instead of the 3 percent simplified levy rate while will not be allowed to credit their input VAT from output VAT even with valid input VAT invoices obtained from suppliers.

 

Improper use of input VAT invoices and issuing incorrect outgoing VAT invoices, including but not limited to using incorrect VAT invoices for credit and export VAT refund, issuing invoices for business of no economic substance, issuing invalid invoices to recipients, and etc., will lead to tax penalty of various amounts depending on the seriousness of the illegal behaviors.

 

If your business is registered for VAT purposes in China, it is possible to declare and deduct input VAT from output VAT incurred by the VAT-subject businesses as long as valid input VAT invoices can be obtained from suppliers and verified timely.

 

Input VAT on the following items shall not be deducted from output tax:

Formally, when the goods are sold or the services are rendered by an entity, output VAT invoices shall be issued to the purchaser of the goods/recipient of the services. The seller shall declare the output VAT in the VAT invoicing system connected to local tax authority, and the purchaser (recipient) is allowed to credit this input VAT from its output VAT.

 

Usually, when the information on the issued VAT invoice is not correct or the goods/services are returned by the purchaser, the seller shall apply with the competent tax authority to issue a reversed VAT invoice to the purcha­ser to reverse its previously recognized output VAT. Meanwhile, the purchaser (recipient) shall reverse its previously recognized input VAT as well.

 

According to a European understanding, a VAT grouping rule between independent legal entities is not implemented.