China Clarifies New VAT Exemptions Applied to Cross-Border Services

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Sept. 26 – China’s State Administration of Taxation promulgated the “Administrative Measures for Value-Added Tax (VAT) Exemptions of Cross-Border Taxable Services in Business Tax to VAT Reform (hereinafter referred to as ‘Announcement 52’)” to clarify the “Regulation on Zero VAT Rate and VAT Exemption Policies Applied to Taxable Services” released as an attachment of Circular 37 in May this year.

Announcement 52 clarifies, in detail, the types of cross-border services that are VAT exempted. It applies retroactively to August 1, 2013, and any qualified revenue from September 1, 2012 to August 1, 2013 could be refunded or offset against tax due in the following period.

We have separated the various types of cross-border services listed in Announcement 52 into three groups for clarity purposes:

  • Type I: General exempted services
  • Type II: Exempted services under the simple tax calculation method
  • Type III: Exempted services provided for overseas entities

Type I: General exempted services
The following cross-border services are exempted from VAT:

Exploration and survey services
Project exploration and survey services provided for projects and mineral resources located overseas.

Convention and exhibition services
Convention and exhibition services provided for conventions and exhibitions held overseas. This includes organizing and arranging services for clients attending conferences and exhibitions overseas.

Warehousing services
Warehousing services provided with the warehouses located overseas.

Personal property leasing services
Tangible personal property leasing services provided they are used overseas.

Publishing and broadcasting services
Publishing and broadcasting services of radio, film, and television programs provided overseas.

Publishing services refer to broadcasting radio, film, and television programs or transferring the right to report or broadcast recreational and sports activities to entities or individuals overseas, as well as reporting and/or broadcasting these programs or activities overseas.

Broadcasting services refer to broadcasting radio, film and television shows in cinemas, theaters, or other places overseas. Broadcasting through radio or television, satellite communication, internet, or cable are not included.

International transport services
International transport services operated without required licenses.

Transportation services
Transportation services provided for traveling between Mainland China and Hong Kong, Macau, and Taiwan operated without required licenses.

Type II: Exempted services under the simple tax calculation method
The simple tax calculation is used for calculating VAT for small-scale taxpayers and public transportation services provided by general taxpayers.

The following cross-border services are exempted from VAT provided they use the simple tax calculation:

  • International transportation services;
  • Transportation services provided for traveling between mainland China and Hong Kong, Macau and Taiwan, as well as transportation services provided in Hong Kong, Macau and Taiwan;
  • R&D services and designing services provided to entities overseas (designing services for immovable properties in China are excluded).

Type III: Exempted services provided for overseas entities
The following taxable services are exempted from VAT when provided for overseas entities:

  • R&D and technology services
  • Information technology services
  • Culture and creativity services
  • Logistics and auxiliary services
  • Certification, authentication and consulting services
  • Production services of radio, film and television programs
  • Time charter services for ocean transportation
  • Voyage charter services for ocean transportation
  • Wet lease for air transportation
  • Advertising services publicized overseas

Note: The “logistics and auxiliary services” listed above include aviation ground services, port services, rail or bus station services, rescue and salvage services, loading and moving services provided in China to foreign transportation businesses. Also, “certification, authentication and consulting services” do not include energy performance contracting services in China as well as authentication and certification services for immovable property or commodities in China.

Announcement 52
According to Announcement 52, taxable services provided to entities or individuals in the zones under special customs supervision in China are not considered to be providing cross-border service.

In order to be qualified for the VAT exemption policy, a written contract between the service provider and the recipient is required, and all income should be earned overseas.

In addition, the sales amount of providing cross-border services should be calculated separately from other businesses to precisely determine the amount of nondeductible input VAT. VAT special invoices are also not allowed to be issued for VAT-exempted sales. The major difference between the zero VAT rate policy and the VAT exemption policy is that the input VAT of activities adopting zero VAT rate policy can be used to deduct its output VAT, which is not allowed for activities applying VAT exemption policy.

In order to enjoy the VAT exemption, taxpayers should complete a record-filing at the competent tax authority by providing the following documents:

  • Record-filing form for VAT exemptions of cross-border services;
  • Original contract for providing the cross-border services and a copy of the contract (including Chinese translation of the contract with company chop or signature of the legal representative);
  • Supporting documents to prove the services are provided in compliance with the exemption’s corresponding requirements;
  • Supporting documents to prove the service recipient(s) are located overseas; and
  • Other documents required by local tax authorities.

All the above documents should be fully preserved by the taxpayer for future tax examination purposes by the State Administration of Taxation.

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