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Tax Transformation from Business Tax to Value-Added Tax in China

The State Administration of Taxation has issued the Provisional Measures of Applying the Exempt, Credit and Refund Method to Zero-rated Value-added Tax Services in Their Transformation from Business Tax to Value-added Tax under the Pilot Program (the “Provisional Measures”) on April 5th, 2012, which has retrospectively become into effective since January 1st, 2012.

The main contents of the Provisional Measures are as follows:

1. The exempt, credit and refund method (the “ECR”) means when the zero-rated VAT services is provided, the Services Provider will be exempted from VAT, the relevant input VAT will credit the payable VAT, and the rest of the input VAT will be refunded.

2. In the pilot area, the legal entity and individual who provide the zero-rated value-added tax (the “VAT”) services and who are deemed to be general taxpayers (the “Services Provider”), are applied the zero-rated VAT and the exempt, credit and refund method, but are not allowed to issue the exclusive VAT invoice under the pilot program.

3. Scope of the Zero-rated VAT Services

a. International Transportation Service, including:

— Transportation of travelers or goods from inside to outside China;
— Transportation of travelers or goods from outside to inside China;
— Transportation of travelers or goods outside China.

However, the transportation of travelers or goods from inside China to the special areas and places supervised by China customs, the transportation of travelers or goods from the special areas and places supervised by China customs to other areas and places inside China, and the transportation of travelers or goods in the special areas and places supervised by China customs are excluded from the scope of the zero-rated VAT service.

b. Provision of the Research and Development Service or Design Service to an abroad entity

The provision of the research and development service or design service to the special areas and places supervised by China customs is excluded from the scope of the zero-rated VAT service.

4. Before the Service Provider apply and file for the ECR of the zero-rated VAT services, it should apply for the identification of the export refund or exemption in the competent tax authority.

The Provisional Measures has been issued in order to interact and ensure that the pilot program of the transformation from business tax to VAT can be successfully preceded. The tax transformation from business tax to VAT now is only piloted in Shanghai and we believe it will be extended to more cities in the near future.