By Gidon Gautel
Any exporting enterprise in China should be well versed in its tax rebate policy. The government began to implement the policy in April 1985 as a way to enhance the country’s competitiveness in foreign markets by eliminating double taxation on exported goods. Export tax rebates refer to refunds of indirect taxes paid by exporting enterprises in the production and distribution process.
China underwent significant VAT reform in 2016 when it initiated the national changeover from Business Tax (BT) to VAT. The VAT tax reform mainly covered services; Intangible assets and immovable properties, meaning that VAT tax refunds for exports have not experienced significant upheaval. However, this is still an area exporters should familiarize themselves with.
Whilst a useful channel for recovering the costs of input taxes paid, not all goods are subject to tax refunds upon being exported. Additionally, businesses must register for, and keep tax authorities updated on their exports eligible for VAT tax refunds.
Zero-rated and exempt goods
Goods and services being exported are either classified as zero-rated or exempt. In effect, neither pay VAT upon export.
Zero-rated goods are technically subject to VAT, however this is set at zero percent. For this group, any input VAT is refundable. However, often the refund rate will be less than the VAT amount paid on input. A full list of refund rates can be found on the State Administration for Taxation website.
A small category of goods, as well as several exported services, is defined as exempt instead of zero-rated. As stated, neither exempt nor zero-rated goods pay output VAT on export. However, for exempt goods, input VAT credits cannot be refunded nor used to deduct output VAT from domestically sold goods. They can however be added to the cost of the exported goods.
As of 2017, exempt goods include:
- Agricultural products sold by agricultural producers;
- Oral contraceptives and contraceptive appliances;
- Ancient books;
- Imported equipment directly used in scientific research, scientific experiments and/or teaching;
- Imported materials and equipment for charitable foreign aid and assistance from foreign governments and international organizations;
- Imported articles for persons with disabilities by organizations supporting persons with disabilities;
- Pre-used equipment.
VAT exemption and rebate policy
Two methods for implementing VAT exemption and rebate policy are applicable to zero-rated goods. Both methods are only available to general taxpayers (those collecting more than RMB 500,000 in revenue). No credit and refund is available for small-scale taxpayers with revenue less than RMB 500,000. The 2016 VAT reforms covered mainly business activities taxed through BT. Because exported goods have always been under the scope of VAT, the reforms have done little to change this.
Exemption, credit, and refund (ECR) method
- Exemption means that goods that are exported by production enterprises either directly or on consignment through foreign trade companies are exempt from output VAT.
- Credit means that, for enterprises whose self-produced goods are both exported and sold domestically, the input VAT credit on materials purchased for the production of export goods is offset against the output VAT on domestic sales.
- Refund means that, after offsetting the input VAT against the VAT payable, any excess amount of input VAT is refundable.
Exemption and refund (ER) Method
- The ER method is applied to the export of goods or services by enterprises with no manufacturing capabilities. Under the ER method, output VAT of the exported goods is exempted, and a certain portion of input VAT is refundable, but not creditable.
While the two methods are comparable in terms of time expended and ease of completion, calculations involved in the ER process are simpler compared to the ECR method.
Consumption tax rebates
For export goods, no consumption tax is payable. If the exported goods were previously imported into China, the consumption tax paid upon import is also refundable. For goods that are VAT exempt, consumption tax is generally also exempt. However, previously paid consumption tax is neither refundable nor creditable from consumption tax payable for domestically sold goods.
How difficult is it to obtain favorable export tax rebate treatment?
In order to receive VAT refunds, exporters must register for a tax refund, including providing their business license and export approval documentation to relevant local authorities. This process is not the same across regions, and businesses should carefully study local rules.
Exporting businesses must also submit monthly declarations for tax refunds, together with supporting documentation. According to James Zheng, Senior Tax Specialist at Dezan Shira & Associates: “Tax filing is separate for manufacturing enterprises and foreign trade enterprises. The monthly tax refund procedure is also relatively complex and may be different for each local tax authority.” He adds: “The timeframe for a VAT refund from the application filing until the monetary refund could be around 2-3 months.”
In order to receive a refund, foreign trade enterprises must submit several declaration forms, as well as the relevant electronic data pertinent to these forms. These include: a summarised declaration form for export tax refunds, a customs declaration form for exports, and a VAT declaration forms for export tax refunds. Several further forms and documents are required, and tax authorities may require additional documents along with the standard list.
The list of required documents for manufacturing enterprises is even longer than that for trade enterprises. Multiple proof materials are required along with several declaration forms. Additionally, if it is deemed that manufactured goods exported by manufacturing enterprises fall under the scope of taxable consumables subject to consumption tax, further proof documentation and declaration forms are required in addition to the standard list.
When applying for a VAT refund, certain categories of exporters may also have to comply with specific requirements according to their industry. Zheng explains: “VAT exemption not only applies to the export of goods but may also be applied to the export of services. The Recent VAT reform gives relatively clearer and more specific conditions on VAT exemption for the export of services, however there is still some uncertainty.” He goes on: “Unfortunately, VAT exemption is now included under filing procedures which will be based on the taxpayers’ judgement on whether to do VAT filing. Tax bureaus cannot give an opinion on whether a business qualifies and the filing will be subject to future tax audits.”
The following services could fall under this scope (non-exhaustive list):
- Construction services of overseas engineering projects.
- Project supervision services of overseas engineering projects.
- Engineering survey and exploration services of overseas projects and mineral resources.
- Lease of tangible movables that are used overseas.
- Broadcast of radio and television programs (works) provided overseas.
- Cultural and sports services, education and medical services, and travel services, which are provided overseas.
- Telecommunication services.
- Intellectual property services.
- Logistics auxiliary services (except for warehousing services, and collection and delivery services).
- Authentication and consultation services.
- Business support services.
- Advertising services where the advertisement is released overseas.
- Intangible assets.
- International transportation services provided via the method of carriers without transportation vehicles.
- Direct charges financial services provided for monetary financing between overseas organisations and other financial transactions, and such services are unrelated to goods, intangible assets and immovables in China.
Specific requirements are likely to vary based on different tax bureaus. Therefore, it is highly recommended for any enterprise hoping to receive favorable treatment in regards to export tax rebates to contact an advisor to help them navigate this complex, yet beneficial system.
Editor’s note: This article was originally published on March 22, 2016, and has been updated to include the latest regulatory changes.
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