On April 1, 2019, China’s Ministry of Finance (MOF) and State Administration of Taxation (SAT) released the Announcement on Relevant Policies for Deepening Value-Added Tax Reform (Announcement  No. 39).
For the first time, the Announcement No.39 sets the policy for the refund of end-of-period value-added tax (VAT) credit – the overpaid input VAT at the end of each taxable period. The policy is applicable for general VAT taxpayers in all industries in China.
On September 4, the MOF and SAT released another Announcement on the Policy for the Refund of End-of-Period VAT Credit for Some Advanced Manufacturing Taxpayers (Announcement  No.84).
Unlike the Announcement No.39, which targeted general industry taxpayers, Announcement No.84 specifies a similar but more relaxed tax refund policy for “some advanced manufacturing taxpayers”.
Who are the eligible advanced manufacturing taxpayers?
Accounting to Announcement No.84, “some advanced manufacturing taxpayers” include those producing and selling four types of products:
- Non-metal minerals;
- General equipment;
- Special equipment; and
- Computer, communication, and other electronic devices.
Further, the sales revenue for the above products must account for more than 50 percent of the manufacturing taxpayers’ total sales revenue.
The proportion of the sales revenue should be calculated based on the sales volume of 12 consecutive months prior to the application for tax refund.
For taxpayers whose operating period is less than 12 months but more than three months, the proportion should be determined by the actual sales volume of the operation period.
Taxpayers with an operating period of less than three months are ineligible to apply.
Interested manufacturing VAT taxpayers can apply to the relevant tax authorities for refund of incremental excess VAT paid starting July 1, 2019.
What is the end-of-period VAT credit?
As we know, the VAT payable for a general VAT taxpayer equals the current output VAT deducted by the current input VAT:
VAT payable = current output VAT – current input VAT
At the end of one taxable period, when the taxpayer’ current output VAT is insufficient to the current input VAT, there is a negative difference, which is called the “end-of-period VAT credit” or “end-of-period excess VAT paid”.
Previously, the excess VAT paid was not refundable in the current taxable period but could be deducted in the next taxable period.
Now under the new policies, for eligible taxpayers, the “incremental VAT credit” – the excess VAT paid after the end of March 2019 – can be refunded in the current period. Excess VAT paid before the March 31, 2019 will follow old policies and cannot be refunded.
How to calculate the refundable end-of-period VAT credit for advanced manufacturing taxpayers and other taxpayers?
For most taxpayers, the incremental VAT credit refundable shall be calculated under the following formula:
Incremental VAT credit refundable = incremental VAT credit × input VAT composition ratio × 60%
For advanced manufacturing taxpayers, the formula shown as below is slightly different:
Incremental VAT credit refundable = incremental VAT credit × input VAT composition ratio
In both situations, “VAT input tax composition ratio” means the proportion of the deducted input tax indicated on the special VAT invoices, special tax payment receipts issued by customs for import VAT, and tax payment vouchers to the total deducted input tax during the period from April 2019 to the taxable period before applying for a tax refund.
A comparison of Announcement No.84 and Announcement No.39
Compared with the Announcement No.39, the Announcement No.84 relaxed the prerequisites of tax refund and raised the proportion of tax refund for some advanced manufacturers.
The Announcement No.39 requires that the incremental VAT credit of other taxpayers to be more than zero for six consecutive months (two consecutive quarters if tax is paid on a quarterly basis) from the taxable period of April 2019, and the incremental VAT credit in the sixth month is not less than RMB 500,000 (US$70,500).
In the Announcement No.84, eligible advanced manufacturing taxpayers don’t need to meet the six-month and RMB 500,000 requirements, so long as their incremental VAT credit is more than zero.
Moreover, according to the formula in Announcement No.84, the proportion of tax refunds for eligible advanced manufacturers has been increased to 100 percent instead of 60 percent for other taxpayers.
These relaxed policies are undoubtedly a great benefit for qualified advanced manufacturing VAT taxpayers, which will ease cash flow pressure and reduce the financial cost of taxpayers.
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