China clarifies VAT exempt services rules
Following the launch of the Chinese VAT pilot in 2012, the Chinese tax authorities have released last month detailed guidance on the rules around the exemptions for VAT on export services.
China adopts EU place of supply rules on VAT for services
Broadly, these new rules follow those of other countries operating an OECD-based VAT regimes, and offer businesses a much more equitable system than the existing Chinese Business Tax system. In short, the defined exports will be exempt from Chinese VAT.
This new set of rules will be important for large corporations using subsidiaries in China to provide outsourced administrative or consulting services, software development etc. for foreign group companies. There had been worries about rising costs on Chinese VAT on transport too during the shift from Business Tax.
The new rules (Announcement 52) issued by the State Administration of Taxation contain guidance on how to obtain exemption from China VAT for exporters. The services covered by the exemptions include: transport and logistics; IT and software; consulting; R&D; intellectual property and copyright; and leasing of movable property. The overriding condition is that the service is provided outside of the boundaries of the People’s Republic of China.
Requirements for Chinese VAT exemption
The following requirements are made to qualify for the Chinese VAT exemption:
- Services are paid for outside of China under a full, written contract
- Clear and separable recording within the accounting system of transactions nuder the exemption
- All exempt services must be reported, with supporting invoice and contracts, plus potentially proof that the services were conducted outside of China