China’s SAT Issues Measures for Claiming Zero-Rated VAT

April 26, 2012 Posted by China Briefing Reading Time: 4 minutes

Apr. 26 – Following the pilot value-added tax (VAT) reform and the issuance of the “Circular on the Application of Zero VAT Rate and VAT Exemption on VATable Services (caishui [2011] No. 131, hereinafter referred to as ‘No. 131’),” China’s State Administration of Taxation (SAT) on April 5 issued the “Announcement on Promulgating the Administrative Measures on Applying Tax Exemption, Offset and Refund on Taxable Services of Zero Value-added Tax Rate in Pilot Areas for Value-Added Tax in Lieu of Business Tax (Interim) (SAT Announcement [2012] No. 13, hereinafter referred to as ‘Announcement No. 13’).”

While No. 131 provides that the export of certain types of services can be treated as zero-rated or exempt for VAT purposes, Announcement No. 13 sets out the application procedures and documentation requirements for claiming zero-rated VAT exemption, offset and refund for taxable services under the VAT pilot program.

Zero-rated taxable services include:

International transportation services
Research and development as well as design services provided for overseas entities

These services are zero-rated, meaning that no output VAT is payable, but input VAT credits can be claimed for expenses incurred by the business in supplying these services.

Announcement No. 13 sets out the refund procedures where a business’s input VAT credits exceed its output VAT liability in any tax period.

Approval and documentation requirements for zero-rated tax exemption offset and refund
Before claiming zero-rated tax exemption, offset and refund, service providers must apply for the export tax refund (exemption) status with the competent tax authority. Once this status is granted, the zero-rated VAT service providers can start collecting the required documents for applying for zero-rated VAT refund, offset and exemption.

Below, we specify the documents required for the export tax refund (exemption) verification and the zero-rated VAT refund, offset and exemption application.

International transportation services
The documents required for zero-rated VAT refund and exemption for international transportation services are as follows:

Summary of declaration for tax exemption, offset and refund and the exhibits thereof
Schedules of tax exemption, offset and refund declaration on zero-rated taxable service (international transportation)
The VAT payment declaration for the current period
Electronic data for official declaration of tax exemption, offset and refund

Additionally, the following original vouchers are required:

The manifestation of the zero-rated taxable carriage of goods or passengers (or other lists or vouchers which are capable of reflecting the original constitution of the income)
Invoices for providing zero-rated taxable service
Other vouchers required by the competent tax authority

A separate set of documents are required for verification of tax refund and exemption, however these vary within the international transportation service industry. The required documents for international waterway transportation, international aviation transportation and international road transportation are listed below.

1. International waterway transportation

Bank account opening permit
International shipping transportation license

2. International aviation transportation

Bank account opening permit
Public aviation transportation enterprise operation license (business scope shall cover “international aviation transportation of passengers, goods, and mails”)

3. International road transportation

Bank account opening permit
Road transportation operation license and international automobile transportation driving license (business scope shall cover “international transportation”)

Research and development and design services
The documents required for zero-rated VAT refund and exemption for research and development and design services are as follows:

Summary of declaration for tax exemption, offset and refund and the exhibits thereof
Declaration schedules of tax exemption, offset and refund for taxable services (research and development and design services)
The VAT payment declaration form for the current period
Electronic data for official declaration of tax exemption, offset and refund

Additionally, the following original vouchers are required:

Copy of the technology export contract registration certificate corresponding to the income from zero-rated taxable services
The research and development and designing contract signed with overseas units
Invoices for providing zero-rated taxable services
List of details on received business payment for research and development and designing services provided to overseas units
Receipt voucher for income received from the overseas units with whom the research and development and design contract has been signed
Other vouchers required by the competent tax authority

A separate set of documents are required for verification of tax refund and exemption, these are as follows:

Bank account opening permit
Registration certificate of the technology export contract

For new zero-rated VAT service providers
New zero-rated VAT service providers, i.e. service providers who have never supplied zero-rated VAT services before the pilot VAT reform, are required to submit the calculation of tax exemption, offset and refund separately on a monthly basis for the first six months of providing services for the tax authorities’ examination. If the tax authorities are satisfied with each month’s calculation, it will process the total accumulated refund on the seventh month. The new service provider should declare tax exemption, offset and refund on a monthly basis from the seventh month.

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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