Clarification Regarding China’s VAT Treatment on Sales of Used Fixed Assets

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May 1 – The State Administration of Taxation (SAT) issued an announcement at the beginning of the year further regulating the value-added tax (VAT) treatment on the sales of used fixed assets. The “Announcement on VAT Issues Concerning the Sale of Self-used Fixed Assets by VAT General Taxpayers (SAT Announcement [2012] No.1, hereafter referred to as ‘Announcement 1’),” specifies two situations under which the sales of used fixed assets are subject to VAT at 4 percent with a 50 percent reduction.

Announcement 1 was issued as a supplement to two previous circulars that provided for the VAT treatment of sales of used fixed assets. The first circular, the “Notice on Certain Issues Concerning VAT Reform in China (caishui [2008] No. 170, hereafter referred to as ‘Circular 170’),” promulgated on December 19, 2008, provides that VAT taxpayers (located in areas outside of the VAT reform pilot areas) who sell used fixed assets before December 31, 2008 are subject to VAT at 4 percent with a 50 percent reduction, while VAT general tax-payers selling used fixed assets that are acquired or self-manufactured on or after January 1, 2009 are subject to VAT at its applicable tax rate.

Circular 170 incorrectly assumes that the input VAT for all fixed assets acquired or self-manufactured on or after January 1, 2009 has already been deducted, and therefore should be subject to the non-reduced VAT rate when they are sold. However, it failed to take into consideration circumstances such as where the fixed assets were purchased for VAT exempt items, for which the input VAT cannot be deducted.

The second circular, the “Notice on the Application of Low Value-added Tax Rate and Simplified Method to Certain Goods (caishui [2009] No.9, hereafter referred to as ‘Circular 9’),” promulgated on January 19, 2009, attempts to rectify the insufficiencies of Circular 170. Circular 9 provides that, where VAT taxpayers sell used fixed assets for which input VAT is not creditable under Article 10 of the Interim Regulations on VAT (e.g., goods or taxable services purchased and used for non-VAT-taxable items, VAT-exempt items, collective welfare or individual consumption), VAT at 4 percent with a 50 percent reduction should apply.

However, Circular 9, by referencing Article 10 of the Interim Regulations, did not cover situations such as where the general VAT payer was a small-scale taxpayer at the time of purchase, or self-manufacture of the fixed asset, or where the simplified VAT calculation method applied to the transaction, and thus input VAT was not deducted. Announcement 1 therefore specifically included these two circumstances, to which the 4 percent VAT and 50 percent reduction applies.

The core principle underlying when the reduced VAT rate applies should simply be whether or not input VAT has already been deducted. However, such general provision has yet to be issued, and for now the reduced VAT rate for sale of fixed assets only applies to the situations covered in the above announcement and circulars.

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