Key highlights:

 VAT reform: Expansion of scope

On December 12, 2013, China’s Ministry of Finance “MoF” and the State Administration of Taxation “SAT” jointly issued Circular 106 (Caishui [2013] No. 106) providing guidance to expand the value-added tax “VAT” pilot program. This circular will come into effect on January 01, 2014.

Railway transportation and postal services:

The two new sectors, railway transportation and postal services, will be incorporated in the scope of services subject to VAT at 11%.

With the addition of railway transportation and postal services in the scope of VAT reform program, the service providers paying VAT will be eligible to claim input VAT credits on their purchases. The service providers will also be able to issue VAT invoices to the service recipient. If the service recipient is a general VAT payer, they may take advantage of input VAT credits. Overall, the commencement of VAT will reduce the tax burden for both the service providers and service recipients.


Other services include:

Financial leasing services:

Lease back service: In 2010, the State Administration of Taxation issued announcement 13 according to which, in a lease back arrangement, asset sale by a lessee to a lessor is not a VAT-able transaction which means no special VAT invoice can be issued. Further, a lessor (General tax payer) receiving all lease payments (i.e. principal and interest payments) from the lessee will be subject to 17% VAT on the lease payments; however, lessor will not be able to claim input VAT credits with respect to the purchase price of the leased object (i.e. principal) in a leaseback according to Circular 37. This caused significant concern for the finance leasing companies as they were required to pay tax on the principal itself, which increased their tax burden for finance leasing.

Circular 106 resolves the issue by adding principal payment to the list of deductible items for VAT calculation purposes. The VAT invoice issued by the lessor will be an ordinary one. Also, circular 106 eliminates several expenses from the list of deductible items, such as import consumption tax and custom duty.


Offshore outsourcing services:

Under circular 37, offshore outsourcing services were exempt from VAT till December 31, 2013. Now with the issuance of circular 106, the VAT exemption has been extended to December 31, 2018.

International freight services:

Under BT regime international freight charges were not subject to BT. However, after the release of circular 37, the international freight charges was subject to VAT and additional surcharges, commencing 01 August 2013. After the release of circular 106, international freight charges will be excluded from computation VAT basis if the tax payer is a general tax payer.


As a part of the PRC government's efforts to upgrade the economic structure, it will continue to expand the scope of its VAT pilot program until business tax “BT” is completely replaced by Value-Added Tax “VAT”. It is expected that the telecommunication sector will transition to a VAT regime starting April 1, 2014. In 2014, more industries should be added to the scope of VAT reforms, such as real estate, financial services, telecommunication, etc. We will keep a vigilant eye on further development in the VAT reform and keep you posted through our newsletters. 

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