China’s VAT Reform – Coping in the Transition Period, discussing “Super Credit,” and Who Qualifies for Refunds and Deductions

We sit down with tax specialist Tammy Tian, senior manager of Dezan Shira & Associates Corporate Accounting Services team, as she discusses the impacts of the VAT Reform on taxpayers in China.

With the new VAT rules and rates in effect, how would you recommend companies cope in the transition period?

I would recommend that companies follow four steps when dealing with the VAT reform transition period. 

1. First companies should correctly recognize their VAT liabilities, paying attention to when they need to recognize VAT income, what rates should be used, and the supporting documents needed such as contracts and receipts.
2. Companies should then update their fapiao systems and issue sales fapiaos in the correct tax rates.
3. Relevant terms in sales/purchase agreements should be prepared and decided on.
4. Finally, companies should negotiate purchase price with vendors.

What is the VAT “super credit” and who can benefit from it?

The VAT “super credit” allows for additional VAT deductions for certain service industries.  Between April 1, 2019 and December 21, 2021 taxpayers are eligible for an additional 10% deduction based on deductible input VAT.

Companies can enjoy the super credit for four services: postal, telecommunication, modern, and livelihood services. 

Postal and telecommunication services are relatively straight forward.  Modern services included things such as R&D, logistics support, and authentication consulting services.  Livelihood services include services such as education, entertainment, health, and accommodation services.

Those that are registered before March 31, 2019 can enjoy the input VAT super credit after April 1, 2019 if they are a VAT general taxpayer and the four above services’ incomes accounts for more than 50% of sales in the past 12 months.

Those that have registered after April 1, 2019 can enjoy the super credit after they register as a VAT general taxpayer and if the four above services’ incomes accounts for more than 50% of sales in the following 3 months after setup.

Under the new reform what are the criteria for qualifying for a refund of excess input VAT credits?

In order to qualify for a refund, taxpayers must meet 5 criteria:

1. An A or B rating for Taxation Credit
2. Starting from April 1, 2019, for a period of six consecutive months, each month’s incremental overpaid VAT must be greater than 0. The incremental overpaid VAT in the sixth month needs to be greater than RMB 500,000.
3. The taxpayer does not enjoy the policy of refund-upon-levy or refund-after-levy starting from April 1, 2019.
4. Within 36 months before applying for the refund, the taxpayer hasn’t been penalized 2 or more times for tax evasion.
5. Within 36 months before applying, the taxpayer hasn’t committed fraud for overpaid VAT refund or export refund nor falsely issued VAT special fapiaos.

Can all the passenger transportation services that a company has paid be deducted?

First of all, the company is required to obtain valid supporting documents to deduct passenger transportation service such as a VAT special fapiao, VAT e-general fapiao, or a ticket with passenger identify information stated on it.

Secondly, the paid passenger transportation service needs to be for company business purposes only and not for other non-VAT-taxable items.  The passenger must also be an employee of the company and travel must have occurred within China after April 1, 2019.