Jul 18, 2014

China increases VAT exemptions

[Shanghai Bureau]
In light of the problem concerning the inability to resolve the issues about the 6% value-added tax (VAT) on international transport services in China, the country's State Administration of Taxation (SAT) recently released a bulletin stating that the scope of the exemptions for international cargo transport agency services will be expanded to indirect deals with international transport providers (carriers). To take effect on September 1, the new ruling apparently aims to provide exemptions to the transactions between carriers and primary agents of cargoes who directly deal with carriers and secondary agents who have no direct contracts with such carriers. Skirting the VAT has thus far been done mainly through the deduction of deemed costs and the application of zero tax rates. Without application bylaws, however, the interpretation of the regulations differ at each tax office, leading to a large number of cases where taxes continue to be levied. A source affiliated with the local logistics industry is hopeful that, "The situation might improve with the new method." Meanwhile, the SAT also said that starting August 1, they will shift to a new formula wherein the receipts for forwarding services can now be included in the receipts that serve as proof of taxation.

The SAT and the Ministry of Finance (MOF) enforced the "pilot notice on change from trade tax to VAT in railway and postal services" (Circular 106) that incorporates an annex stipulating the resumption of the deduction of deemed costs in the freight rates in relation to the VAT imposed on international transport services. All related tax systems that change the previous trade tax to VAT were abolished and unified with the above Circular 106.

Circular 106 saw the revival of the paragraph that says that profits made after deducting international transport costs that are paid to the carriers will be taxable for international cargo transport agency services (forwarding, port export/import, piloting, mooring/port-related services, stevedoring, as well as ship booking, business work correspondence, cargo transport booking, container management and clearance related to international marine transport). With this, it looked like VAT will be virtually exempted under the law. But regardless of the fact that the application procedures related to receipts have already been changed, the absence of bylaws is leading to the differing interpretations and actions of tax offices and officers in charge. As a result, numerous forwarders and booking agents are forced to pay 6% VAT.

The SAT released the "announcement on the VAT issues in international cargo transport agency services" (Announcement No. 42 for 2014) on July 4. With the new circular, the scope of tax exemptions listed in Paragraph 3 of the Annex of Circular No. 106 will be expanded to include companies that indirectly provide the same services, with the exemption amount set to the "the entire agency service revenues."

With regard to the VAT, there are two kinds of receipts (invoices) submitted by customers for each transport job, comprising the VAT special receipt and the VAT ordinary receipt. In the case of deals wherein the deemed costs are deducted, the special receipt, zero tax rate and the above ordinary receipt for tax exemption will apply. But even though the special receipt can be issued between carriers and primary agents, the primary agents are unable to cut special receipts to secondary agencies. This point complicates the problem. However, it seems that tax exemptions will be given through ordinary receipts in transactions with secondary agencies. "In Shanghai, for instance, the authorities provide tax exemption on secondary agency deals (that could not avoid taxes, including zero tax rate). With this, we will probably return to the common application," said a local forwarder-affiliated source, who added that, "The situation should improve with the increase in options (to avoid taxes)."

Moreover, the SAT issued the "announcement on the use of new versions of VAT receipts" (Announcement No. 43) on July 8. Aside from updating both the special and ordinary receipts starting August 1 (old versions of the receipts may continue to be used for the time being), the announcement also discussed about VAT special receipts for cargo transport. However, the cargo special receipts have not been regularly issued in recent years, so a local forwarder-affiliated source, who, while expressing confusion about the new ruling, still believed that, "The relationship with Announcement No.42 may not be stated, but it probably just aims to get rid of the confusion in the receipts toward integration (of the receipts of cargo transport agencies) in the future."

For now local industry-related sectors are making preliminary calculations on tax avoidance through exemptions and are dealing with the local tax agencies while focusing on new developments on the field.

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