China to Levy VAT on the Telecom Sector Starting June 1

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SHANGHAI—To further promote China’s value-added tax (VAT) pilot reforms, the State Administration of Taxation (SAT) recently released the “Provisional Measures for the Administration of VAT Collection from Telecom Enterprises” (SAT [2014] No. 26, ‘Measures’) and the “Announcement on Including the Telecom Industry in the VAT Pilot Reforms” (Cai Shui [2014] No. 43, ‘Announcement’). According to these documents, the telecom industry will be subject to VAT, rather than business tax (BT), from June 1, 2014.

Launched in 2012, the VAT pilot reforms are expected to eliminate differential treatment between the sales of goods and provision of services. The two documents aim at breaking up the monopoly of state-owned enterprises (SOEs) on telecom services in China, a move that is hoped to enhance the competitiveness of companies in the telecom services sector.

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Telecom enterprises mainly conduct two kinds of services: basic telecom services, consisting of voice communication services, and value-added telecom services, consisting of text messaging, internet access, electronic data and information transmission services. The SAT clarified that the VAT rate for basic telecom services and value-added telecom services will be 11 percent and six percent, respectively. VAT exemptions shall apply to:

  • Telecom services for offshore organizations; and
  • Telecom services provided in the form of credit exchanges.

General taxpayers (taxpayers with an annual sales volume of taxable services equivalent to or exceeding RMB 5 million) are allowed to calculate VAT using the simplified calculation method for their provision of voice communication services and electronic data and information transmission services via satellites before December 31, 2015. Here, no input VAT is deductible and a uniform three-percent levy rate applies.

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