How to Save VAT on Cross-border Transactions in China
Value-added tax (VAT) is the main form of indirect taxation in China and applies to both the sale of goods and the provision of services. Since 2016, the VAT has served as the country’s only indirect tax, replacing the business tax that previously applied to a number of industries.
Investors importing goods to China are subject to VAT at the same applicable tax rates applied to goods sold within the domestic market which, subject to the May 2018 reforms, are now 6, 10 or 16 percent.
Still, exporting certain taxable services from China to foreign countries can allow investors to benefit from certain VAT reliefs.
There are two types of transactions in which VAT relief is available, these are:
- Zero-rated transactions; and
- VAT exempt transactions
Both VAT reliefs are exempt from any output VAT. The difference between the two are that under zero-rated VAT, the input VAT attributable to the export of services can be credited from VAT payable and/or refunded, while under VAT exemption, the input VAT attributable to export of services cannot be credited or refunded.
Pursuant to Caishui  No. 36, if a pilot service is eligible for both VAT zero-rating and VAT exemption, the taxpayer may choose which one to apply. Whether an investor chooses a zero-rated VAT or tax exemption should depend on the overall VAT structure of the company.
Taxpayers who have little input VAT deductible are not advised to apply for a zero-rated VAT, given that the procedures for obtaining a tax refund for zero-rated VAT services is quite complex and time-consuming.
Providers of zero-rated VAT services may opt to pay VAT or apply for VAT exemption instead by filing a relevant declaration. However, taxpayers will be prevented from electing VAT zero-rating in the subsequent 36 months.
VAT zero-rated transactions
Goods and services that are subject to zero percent VAT include: export goods, international transportation services (if taxpayers obtaining qualifications), and space transportation services.
In addition to this, a number of cross-border services provided to overseas entities, which are fully consumed overseas, also incur zero percent VAT. Appendix IV of Cai Shui  No.36 describes ‘fully consumed overseas’ to be where the actual recipient of the services is overseas and the services are unrelated to goods and immovables in China, and the intangible assets are used overseas entirely and unrelated to goods and immovables in China.
The cross-border services that are subject to zero percent VAT include:
- R&D services;
- Energy management contracting services;
- Design services;
- Radio and television programs (works) production and distribution services;
- Software services;
- Circuit design and testing services;
- Information system services;
- Business process management services;
- Offshore service outsourcing business, including information technology outsourcing (ITO services, technical business process outsourcing (BPO), technical knowledge process outsourcing (KPO);
- Transfer of technology.
If a domestic entity or individual providing zero-rated services adopts the simplified tax calculation method, then the services provided will only be eligible for VAT exemption.
Please note that no special VAT invoice can be issued for zero-rated services. To be eligible for the zero-rate treatment, taxpayers are required to provide relevant permits or certificates and have a qualified business scope.
For example, for international transportation services, taxpayers need to submit business licenses and relevant transport permits; for R&D, design services, and transfer of technologies, the “Technology Export Contract Registration Certificate” is required; and for most other services under the zero-rate category, the “Offshore Service Outsourcing Contract Registration Certificate” is required.
To enjoy VAT exemptions on cross-border services, a written contract is generally required; the entire payment should be sourced overseas; and the sales of the cross-border services provided must be accounted separately.
Moreover, the taxpayer should submit required materials to tax bureaus in charge to go through the record-filing process.
While detailed procedures vary from city to city, the taxpayer should make record-filing within the VAT declaration period from the following month of accounting for sales income to April 30 of the following year, and the filing documents should be well reserved.
In the follow-up supervision or audit process conducted by the tax bureau, the VAT exemption benefits might be challenged if there are any discrepancies within the filing documents, or the filing documents could not be provided. Under this circumstance, tax penalties, such as overdue fees, fine, as well as taxpayer blacklist might be applied.
The following cross-border services are subject to VAT exemptions:
- International transportation services provided via the method of carriers without transportation vehicles, or when taxpayers don’t obtain required qualifications;
- Postal services, collection and delivery services, and insurance services, which are provided for exports;
- Services and intangible assets provided to overseas entities, which are fully consumed overseas, including
- Telecommunication services,
- Intellectual property services,
- Logistics auxiliary services (except for warehousing services, and collection and delivery services),
- Authentication and consultation services,
- Professional and technical services,
- Business support services,
- Advertising services where the advertisement is released overseas, and
- Intangible assets;
- Services such as
- Construction services of overseas engineering projects,
- Project supervision services of overseas engineering projects,
- Engineering survey and exploration services of overseas projects and mineral resources,
- Conference and exhibition services of overseas conferences and exhibition,
- Warehousing services where the storage venue is overseas,
- Lease of tangible movables which are used overseas,
- Broadcast of radio and television programs (works) provided overseas, and
- Cultural and sports services, education and medical services, and travel services, which are provided overseas;
- Direct charges financial services provided for monetary financing between overseas enterprises and other financial transactions, and such services are unrelated to goods, intangible assets and immovable in China.
This article was originally published in the Tax, Accounting and Audit in China 2018 (10th Edition) and has been updated to reflect the latest regulatory changes at the time of publication.