China’s VAT Reform: General Taxpayer Status and Tax Filing Issues

December 14, 2011 Posted by China Briefing Reading Time: 5 minutes

Dec. 14 – Following the promulgation of two circulars on the pilot project for replacing the imposition of business tax (BT) with value-added tax (VAT) (Circulars No. 110 and 111) in the transport industry and certain modern service sectors in Shanghai, China’s State Administration of Taxation (SAT) recently clarified more issues regarding the VAT reform – including the application of VAT general taxpayer status in the pilot area and VAT filing issues in non-pilot areas.

VAT general taxpayer status application in the pilot area
The SAT issued the “Circular on Relevant Matters in the Recognition of VAT General Taxpayer Status in the Reform to Replace the Imposition of BT with VAT in Shanghai (Circular [2011] No. 65, “Circular”)“ on December 2, 2011.

According to the Circular, taxpayers with an annual sales value exceeding RMB5 million earned from engaging in the taxable services under the pilot project should apply for VAT general taxpayer status with the in-charge tax authority. The annual sales value of taxable services refers to the cumulative sales value, in a consecutive period not exceeding 12 months, from the provision of services in the transportation industry and certain modern services industries. The annual sales value includes the sales value to which tax exemption or reduction applies.

The Shanghai Municipality local tax bureau issued a regulations in August 2010 (hudishuihuo[2010] No. 28) permitting certain companies in the transport industry, service industry, and other sectors to deduct certain payments to third parties from the total price and all other charges receivable from the provision of taxable services, with the resulting amount deemed to be the annual sales value based on which BT is calculated. For purposes of determining general taxpayer status, the annual sales value will be the value prior to such deductions.

Any taxpayer in the pilot areas that is: engaged in land or inland water transportation of cargo; an invoice issuing taxpayer; and passed the 2011 annual audit shall be recognized as a general taxpayer regardless of whether or not its annual sales amount of taxable services exceed RMB5 million.

Such taxpayers – and taxpayers that have already obtained general taxpayer status and provide taxable services under the pilot project – do not need to reapply for general taxpayer status, and the in-charge tax authority will compile and deliver a “Tax Matter Notification” to the taxpayer.

Taxpayers with an annual sales value of under RMB5 million, and those who have newly established their businesses, can apply to be recognized as general taxpayers with the in-charge tax authority.

Applicants meeting the below requirements should be granted general taxpayer status by the in-charge tax authorities:

Have a fixed production and business premises; and
Able to set up books in accordance with China’s stipulations on the unified accounting system, carry out accounting and auditing on the strength of legal and valid vouchers, and able to provide accurate tax materials.

VAT Filing outside in non-pilot areas
The SAT also released the “Announcement on Issues Concerning VAT Filing Adjustment (SAT Announcement [2011] No.66)” on December 2, which specified VAT filing issues for VAT payers in non-pilot areas.

The tax filing forms for both general and small-scale VAT payers in non-pilot areas have not changed, but there are a few adjustments made when VAT general taxpayers that receive the newly-included VATable services fill out the “Appendix (Form II) to the VAT Filing Form”:

A VAT general taxpayer which receives modern services provided by VAT payers in the pilot area shall fill out Item 2 – “Input VAT verified and deductible during this term” – with the VAT Special Invoices it obtained.
A probationary VAT general taxpayer which receives modern services provided by VAT payers in the pilot area shall fill out Item 3 – “Input VAT verified last term and deductible this term” – with the officially issued verification result notice and the list of deductible VAT items that have passed verification.
A VAT general taxpayer which receives transport services provided by VAT payers in the pilot area shall fill out Item 8 – “Transport fee settlement paperwork” – with the Transport VAT Special Invoices it obtained. Under Item 8:
1) The item “amount” shall be filled out with the “total amount” shown on the Transport VAT Special Invoice
2) The item “taxation” shall be filled out with the “tax amount” shown on the Transport VAT Special Invoice if the applicable tax rate is 11 percent; the item shall be filled out with the result from “7 percent (deduction rate) × ‘price and tax totals’ shown on the Transport VAT Special Invoice” if the applicable tax rate is not 11 percent
A VAT general taxpayer shall include input VAT on VATable services that shall be paid back in accordance with the VAT law when filling out Items 13 to 21: “input VAT payback”
A VAT general taxpayer shall include input VAT on VATable services that cannot be deducted during the term or cannot be deducted in accordance with the VAT law when filling out Items 22 to 34: “input VAT items waiting to be deducted”

Announcement No.66 also mentioned that the VAT filing details in the pilot area shall be specified by the Shanghai Local Taxation Bureau at a later date.

Announcement No.66 will take effect on January 1, 2012.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises with their tax obligations. For further advice and specifics relating to these recent measures, please email china@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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