Tax Benefits of Exporting Services: VAT Exemption vs. Zero-Rated VAT

By Dezan Shira & Associates
Editor: Rainy Yao

With China’s value-added tax (VAT) reform to be fully implemented nationwide by the end of this year, both the sale of goods and the provision of services will soon be subject to VAT instead of the previous business tax. Investors exporting goods to China will also need to pay VAT at the same applicable tax rates applied to goods sold within the domestic market (i.e., 17 percent, and 13 percent for some goods); whereas exporting certain taxable services from China to foreign countries can enjoy VAT exemption or a zero-rated tax rate. But what is the difference between VAT exemption and a zero-rated VAT? Which option is the best for your business? In this article, we examine the details of the VAT incentives offered to cross-border service providers, and give readers a general idea of how to be eligible for the tax breaks.

Difference between zero-rated VAT and VAT exemption

Both zero-rated and exempted VAT services are exempt from output VAT. The difference between zero-rated and exempted VAT is that, under zero-rated VAT, the input VAT attributable to the export of services can be credited from VAT payable and/or refunded. Under the exemption system, the input VAT attributable to export of services cannot be credited or refunded.

According to the Caishui [2013] No.37 released by the state tax bureau, if a pilot service is eligible for both VAT zero-rating and VAT exemption, VAT zero-rating takes precedence over VAT exemption. However, whether an investor should choose a zero-rated VAT over tax exemption depends on the overall VAT structure of the company. Taxpayers who have little input VAT deductible are not advised to apply for a zero-rated VAT, given that the procedures for obtaining a tax refund for zero-rated VAT services is quite complex and time-consuming. Providers of zero-rated VAT services may opt to pay VAT or apply for VAT exemption instead by filing a relevant declaration. However, taxpayers will be prevented from electing VAT zero-rating in the subsequent 36 months.

RELATED: Calculating Value-Added Tax in China

A comparison of the types of cross-border services that are included in the VAT exemption and zero-rated VAT scheme can be found below: 

Cross-border services that subject to VAT exemption

1. Engineering survey and exploration services for which the project and mineral resources are located overseas;
2. Conference and exhibition services for which the conference or exhibition venues are located overseas;
3. Warehousing services for which the warehouses are located overseas;
4. leasing services of tangible movables for which the subject matter is used overseas;
5. Postal services and collection and delivery services provided for exported goods;
6. Services provided overseas for distributing or broadcasting radio, film and television programs (works);
7. International transport services;
8. Transport services provided in the form of road transport to Hong Kong and Macau;
9. Services which taxpayers have announced to waive the zero tax rate and have opted to the tax exemption; and
10. Others services provided to overseas entities 

To be eligible for VAT exemption, taxpayers need to make sure that the service recipients are registered outside China or the services are provided overseas, depending on different types of cross-border services. 

Services eligible for VAT zero rate services

1. Design services provided to overseas entities (excluding architectural design);
2. R&D and technology design services provided to overseas entities by entities and individuals within the territory of China;
3. Certain qualified international transportation services and aerospace transportation services; and
4. Transport services to, from and in Hong Kong, Macau and Taiwan. 

Please note that no special VAT invoice can be issued for zero-rated services. To be eligible for the zero-rate treatment, taxpayers are required to provide relevant permits or certificates and have qualified business scope. For example, for international transportation services, taxpayers need to submit business licenses and relevant transport permits; and for R&D and design services, the Technology Export Contract Registration Certificate is required.

Tax, Accounting, and Audit in China 2015
This edition of Tax, Accounting, and Audit in China, updated for 2015, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.

Importing and Exporting in China: a Guide for Trading Companies
In this issue of China Briefing, we discuss the latest import and export trends in China, and analyze the ways in which a foreign company in China can properly prepare for the import/export process. With import taxes and duties adding a significant cost burden, we explain how this system works in China, and highlight some of the tax incentives that the Chinese government has put in place to help stimulate trade.

Managing Your Accounting and Bookkeeping in China
In this issue of China Briefing, we discuss the difference between the International Financial Reporting Standards, and the accounting standards mandated by China’s Ministry of Finance. We also pay special attention to the role of foreign currency in accounting, both in remitting funds, and conversion. In an interview with Jenny Liao, Dezan Shira & Associates’ Senior Manager of Corporate Accounting Services in Shanghai, we outline some of the pros and cons of outsourcing one’s accounting function.

• Previous Article China’s VAT Reform Moving Forward
• Next Article New Preferential Tax Policies to Boost SMEs’ Development in China