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China’s Software Developers Can Enjoy VAT Refunds

Starting from January 1, 2011, enterprises which develop their own software products or redesign imported software products can have part of their value-added tax (VAT) refunded, said China’s State Administration of Taxation (SAT) and Ministry of Finance recently.

Nationwide VAT refund on software products
According to the “Circular on VAT Policies for Software Products (caishui [2011] No.100)” released on October 13, when VAT general taxpayers sell software products that are developed by themselves or imported and then redesigned for localization reasons, VAT shall be charged at the rate of 17 percent, but the part of VAT in excess of 3 percent of the taxpayers’ actual VAT burden shall be refunded upon collection.

Within every VAT collection term (the term), the amount of VAT refund on software products – which include computer software products, information systems and embedded software products – can be calculated following the formulas below:

  • VAT refund on collection = VAT liability during the term – product sales during the term X 3 percent
  • VAT liability during the term = Output VAT during the term – Deductible input VAT during the term
  • Output VAT during the term = Product sales during the term X 17 percent

For embedded software products, sales value within every VAT collection term (the term) shall be calculated as follows:

  • Sales value during the term = Total sales value of embedded software products, computer hardware, machinery and equipment during the term – Sales value of computer hardware, machinery and equipment during the term

Circular No. 100 also specified the VAT liability on intellectual property rights (IPR) of software products. VAT shall be collected when a taxpayer with the software’s IPR is entrusted to develop the software, but shall not be collected if the IPR is owned by the principal or co-owned by both the principal and the trustee. The IPR transfer – together with the software sale from the entrusted taxpayer – shall also be VAT free.

Software products that are eligible to enjoy the favorable VAT treatment should boast the following qualifications:

  • Obtaining testing proofs issued by software testing institutions that are recognized by provincial authorities in charge of the software industry
  • Obtaining the “Software Products Registration Certificate” granted by authorities in charge of the software industry or the “Computer Software Copyright Registration Certificate” granted by administrations of copyright.

Shenzhen’s practice
Shortly following the issuance of the national Circular, Shenzhen announced its own implementation details in the “Shenzhen’s Administration Method on Software Products VAT Refund-upon-collection (Shenzhen SAT Announcement [2011] No.9)” on October 28.

The document clarifies that the general taxpayers’ sale of individual modules and subsystems of software products that have already received aforementioned official qualifications can also enjoy VAT refunds.

The sales value of self-developed software products and the sales value of other products – such as computer networks, computer hardware, machinery, equipment, other types of goods, other types of software products and taxable services – shall be calculated separately when it is possible, so that general taxpayers can receive the VAT refunds on the sales of the particular software products.

The Shenzhen Announcement also specified several issues concerning the VAT receipts issuance for the sale of related software products.

Another document issued by Shenzhen’s SAT (shenguoshuihan [2011] No.376) stipulated that the new VAT treatment to eligible software products will only apply to the VAT collections within and after 2011. The VAT payments and VAT receipts issuance that took place prior to 2011 shall comply with related regulations released previously (“The Guidance (shenguoshuifa [2008] No.149),” “The Circular (shenguoshuihan [2009] No.204),” and “The Circular (shenguoshuihan [2010] No.192)”)

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