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Case: VAT Refund China – VAT Reform – Deadline March 31st 2014!

(January 22nd, 2014)

by Richard Hoffmann, ECOVIS Beijing China

VAT Refund China Exemption Headquarter Foreign Customer Payment from outside China Chinese Service Invoice 0% VAT VAT refund for VAT paid between Sep. 1st 2012 and Aug. 1st 2013

The deadline for the VAT refund in Beijing is approaching fast – just 2 months left until March 31st, the last day in which companies can apply for it.

If you haven’t heard of it before, on September 13th 2013, the China State Administration Taxation (SAT) announced the new implementation for cross-border services in its “Announcement 52”. Announcement 52 not only set out many administrative and procedural requirements, it also further clarified the VAT exemption for exported services that were previously mentioned in Circular 37 (2013). The best part is that it also outlines how you can recapture the VAT for exported services paid between September 1st 2012 and August 1st 2013. With a usual VAT rate of 6% for services in China this can prove to be quite significant.

In the past few months, we successfully handled a couple of cases with refunds amounting of several hundreds of thousands of RMB. For the VAT refund, it really depends on the case – the nature of services exported, the company structure and the kind of contract governing the export.

In one of our cases a German IT company and its Chinese WFOE subsidiary in Beijing had a service agreement which led to a VAT payment from the German Headquarter to the Chinese WFOE. Thus the Chinese WFOE had to pay 6% VAT when receiving the payment from Germany which it could now try to recapture. In the case of the WFOE providing services to its German headquarter, it is treated as an export of services, and might therefore be eligible for VAT exemption – and for the refund.

VAT calculation, for the case, is shown in the following: for every 100,000RMB contractual amount, the German headquarter has to pay 100,000RMB + 6000RMB VAT to its WFOE. The WFOE gets to keep 100,000RMB and has to pay 6000RMB to the tax office in Beijing. If the contractual amount is tax inclusive, the calculation of the tax amount is

Amount VAT China Calculation

If the exemption and the refund for this particular service are granted, then the WFOE gets a refund for the amount paid between September 1st 2012 and August 1st 2013. In addition, the WFOE might be exempted from the 6% VAT for similar cases in the future. The refund/exemption does not only work for transactions between a WFOE and its headquarters, but also for service exports to other companies outside of China!

The WFOE applied for the VAT refund at the tax office, as it fulfilled the following criteria:

  • The provided IT-services were eligible for VAT exemption
  • The payment for the services were made from outside of China
  • A written contract concerning the providing of these services existed

 

After the refund was granted, further action had to be taken:

  • Revising the corporate income tax return for the previous year, to reflect the change in costs and revenues
  • Reissuing special VAT invoices to clients where the VAT exemption was claimed
  • Checking the contracts with clients if the VAT savings needed to be passed on to them

 

In many cases, the refund is a very significant amount, justifying the efforts for applying and further actions. In any case you should consult with a tax advisor to understand whether you should apply for a refund.

VAT Refund China apply with Tax authorities criteria fulfilled? if refund granted VAT Exemption

As the DEADLINE, March 31st 2014, is approaching soon, you should take action fast, as extensive documentation is needed for the application.

If you need help with your application for the VAT refund or have questions about the proper implementation of the new rules, don’t hesitate to contact us. Let us assist you.

VAT Refund China contact

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Author:
Richard Hoffmann
richard.hoffmann@ecovis.com
Office website

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