Announcement of the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs on Policies for Deepening Value-Added Tax Reform (Mainland China)

Karl Zhang

The Ministry of Finance, the State Administration of Taxation and the General Administration of Customs recently released a joint announcement on deepening value-added tax reform (the “Announcement”).  The Announcement mainly includes the adjustment of the VAT rate, the deduction of input taxes and tax refunds for uncredited input VAT:

1. Adjustment of the VAT rate

According to the Announcement, the tax rate for general VAT payers (the “Taxpayers”) who were previously subject to a 16% VAT tax for selling or importing goods is adjusted to 13%, and for those subject to a 10% tax rate, the new tax rate is adjusted to 9%.  In addition, the deduction rate of agricultural products, the export tax refund rate for exported goods and services and the tax refund rate for duty-free items purchased by travelers overseas are adjusted.

2. Deduction of input tax

The amount of input tax on real estate or real estate construction projects acquired by a Taxpayer will no longer be deducted over a two year period, and any input tax that has not been deducted pursuant to the above provisions may be deducted from the output tax beginning with the tax period of April 2019; any input tax incurred from a Taxpayer’s purchase of domestic passenger transportation services may also be deducted from the output tax.  In addition, a Taxpayer in the production and daily living services sectors may enjoy an additional 10% deduction on the deductible input tax for the period from April 1, 2019 to December 31, 2021.

3. Tax refund for uncredited input VAT

Beginning from April 1, 2019, a new refund system for uncredited input VAT at the end of the VAT period is piloted.  The term “incremental uncredited input VAT” refers to any newly added uncredited input VAT compared with the amount at the end of March 2019.  The amount of incremental uncredited input VAT that a Taxpayer may request a refund of is calculated by the following formula: The refundable incremental uncredited input VAT = incremental uncredited input VAT ´ input ratio ´ 60%.  The input ratio refers to the ratio of the VAT amount set forth in special VAT invoices (including uniform invoices for tax-controlled motor vehicle sales), or special customs bills of payment for VAT on imports, and the tax payment receipts for the entire deducted input tax for the same period.

The Announcement also pointed out that Taxpayers seeking a refund of the uncredited input VAT must meet certain conditions.  For a Taxpayer who exports goods or services or engages in cross-border conduct that is taxable to the extent that the measures for tax exemption, offset and refund apply, if the conditions stipulated in the Announcement are still met after the tax exemption, offset or refund is applied, an application may be filed to refund the uncredited input VAT.  If the measures for tax exemption or refund are applicable, the relevant input tax may not be used to refund the uncredited input VAT.

In general, the preferential treatments under the new VAT policy are relatively strong and have a wide scope of impact.  The State Administration of Taxation also released related detail measures at the same time.  The new policy will go into effect on April 1, 2019.