China Specifies Services Eligible for Zero VAT Rate and VAT Exemption

Posted on by Dezan Shira & Associates

The beginning of China’s pilot value-added tax (VAT) reform has aimed to make transport services and a list of modern services in pilot areas subject to VAT, instead of business tax. Recently, as a new update to the implementation details of the ongoing VAT reform, China’s Ministry of Finance (MoF) and State Administration of Taxation (SAT) clarified that some of these VATable services can enjoy zero VAT rate and VAT exemption.

Zero VAT rate
According to the “Circular on the Application of Zero VAT Rate and VAT Exemption on VATable Services (caishui [2011] No. 131)” issued on December 20, 2011, the following VATable services provided by taxpayers in pilot areas are subject to the zero VAT rate:

  • International transport services (including cross-border and overseas transport of both passengers and cargo)
  • Research and development services provided for overseas entities
  • Design services provided for overseas entities (excluding design services provided for domestic immovable property)

In order to be able to enjoy the zero VAT rate, international transport service providers in pilot areas shall obtain operation licenses as specified in Circular No. 131.

The zero VAT rate is applied on different types of taxpayers by different means.

For taxpayers which employ the general VAT calculation method (which allows the deduction of input VAT from output VAT), the zero VAT rate is implemented through the “exemption, deduction and refund” method, with the tax rebate rate standing at the same applicable VAT rates stipulated in the “Implementation Details of VAT Reform in Transport Services and Certain Modern Services (caishui [2011] No. 111).”

For taxpayers which employ the simplified VAT calculation method (which does not allow the deduction of input VAT from output VAT), the zero VAT rate is simply implemented by means of VAT exemption.

Both types of taxpayers mentioned above shall conduct the required tax exemption, deduction and refund procedures with the tax authorities in charge of tax rebates on a monthly basis. The related declaration and filing details will be announced by the SAT and MoF at a later date.

VAT exemption
The following VATable services provided by taxpayers in pilot areas are exempt from VAT:

  • Project exploration and survey services provided for projects and mineral resources located overseas
  • Convention and exhibition services provided for conventions and exhibitions held overseas
  • Warehousing services provided with the warehouses located overseas
  • Tangible personal property rental services provided with the subject matter used overseas
  • International transport services operated without required licenses
  • The following VATable services provided for overseas entities:
    1. Technology transfer and advisory services
    2. Contracted energy management services (excluding such services provided with the subject matter located within borders)
    3. Circuit design and testing services
    4. Information systems services
    5. Business process management services
    6. Trademark and copyright transfer services
    7. Intellectual property services
    8. Logistics support services (excluding warehousing services)
    9. Certification, authentication and consulting services (excluding such services provided for domestic goods or immovable property)
    10. Overseas advertising services

The Circular took effect on January 1, 2012.

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