VAT refund and exemption according to Announcement 52
(October 11th, 2013)
The new implementation rules for cross-boarder services, announced on 13 th of September by China’s State Administration of Taxation (SAT), are a significant change for many companies whether they are importing or exporting services from or to China. The “Announcement 52 ”, will make it easier for companies to make use of exemption for exported services already clarified in Circular 37 (2013). as it will set out many of the administrative and procedural requirements. Until now there were only few Business Tax related exemptions for companies, exporting their services. As in the past, there was a lack of information about what is needed to have one’s exported services exempted of VAT, many companies couldn’t get their applications approved in some provinces.
These companies could now take the chance to save money by applying the new procedures quickly to their current business decisions. Furthermore, the possibility to recapture VAT. paid between September 1 st 2012 and August 1 st 2013 is very high! Moreover are inter-company exports most often subject of successful VAT exemption. That will be the case, when a WOFE in China provides services for its mother company in their home country. As there obviously exists the risk for abuse, these interactions will be scrutinized in depth by the tax authorities. Companies genuinely providing service export will be satisfied with the new official rules. Now it is necessary for all the companies who in the past self-assessed their eligibility for VAT exemption, to apply for review by the tax authorities. Announcement 52 is the next step to a fully implemented VAT System, being one of the goals of China’s five year plan.
In order to qualify exported services for VAT exemptions it is necessary to meet the new requirements. In the following you will find general and specific requirements of the Announcement 52 . which are the keys for successful VAT tax compliance and give you the possibility to save money, improve your cash flow and put your resources where they are really needed.
The following general administrative and procedural requirements apply to all kinds of exported services eligible to VAT.
- Services must be provided under a written contract
- Payment for the services must be made from outside of China
If a foreign head office outside of China uses its China head office to transfer money to another branch inside China, for services exported to the foreign head office, it would not comply with the current requirements and thus not qualify for VAT exemption.
“It’s highly recommended to revise your internal payment arrangements.”
- Businesses have to account any revenues from exported services separately
Moreover they have to ‘transfer out’ the applicable input VAT and apportion all other input VAT. For fixed assets and intellectual property rights China’s VAT rules contain a special concession. This concession enables companies to claim full input VAT credits although these businesses might include exempted and taxable services.
- No special VAT invoice for these service exports
To make sure, a recipient can’t claim any input VAT, it is not allowed to issue invoices including VAT.
- Same day transmission of documents
Companies are required to submit these documents on the day of applying for VAT exemption, which must be translated into Chinese and need legal or official approval e.g. stamps:
- Cross border taxable service tax record filing form that was issued at the time of release of Announcement 52
- original and a photocopy of the contract
- proof that the service recipient is located overseas when the services were provided
Aligned with the principle that businesses, located in customs controlled zones like free trade zones and bonded logistics parks, only confer special Customs and VAT status to goods, they cannot make use of VAT exemption according to Announcement 52.
Beside the general conditions there exist several special conditions that must be met in some cases. In the following these requirements will be shown in further detail.
- Services must be physically performed outside of China
For certain categories of services, it is necessary to prove, that these were done outside the country.
These categories are:
- engineering survey and exploration services
- conference and exhibition services
- warehousing services
- leasing of tangible movable property
- distribution and broadcasting services for radio and television programs
- advertising services
- Original and photocopy of proof
- international transportation services from or to Hong Kong, Macau and Taiwan, done by operators who do not hold the appropriate licence and small scale taxpayer in the international transportation business must transmit proof that the international transportation took place
As part of the tax filing process, it is crucial to submit complete documentation to the tax authorities. If these documents are incomplete they will not be accepted and you will be asked to revise and resubmit them. Amended contracts, which were already approved for tax exemption, have to be recommenced.
In order to apply for refunds for the period from 1 st of September 2012 till 1 st of August 2013 you also need to consider these essential points:
- VAT that arises from the exemption claimed, must be transferred out
- Last year’s corporate income tax returns will be effected and thus must be revised
- Application for any local levies and surcharges connected to the output VAT paid can be done
- Recalling any special VAT invoices issued to service recipients where the VAT exemption is being claimed
- Checking whether any savings due to tax exemption have to be passed to clients or other service recipients
We suggest you to take action soon, although no official dead line for refund application is mentioned in Announcement 52.
Please contact us for further assistance. We will be happy to support you and optimize the performance of your business.