Latest Regulations on the Transformation from Business Tax to Value-Added Tax in Shanghai

On 16 November 2011, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly issued Caishui (2011) No.110 (Hereinafter refers to “Circular 110”) and Caishui (2011) No.111 ((Hereinafter refers to “Circular 111”) which set forth the Implementation Measures on Pilot Program for the Transformation from Business Tax (“BT”) to Value-Added Tax (“VAT”) in Shanghai (Pilot VAT Measurement). Circular 110 contains the basic framework of the Pilot VAT Measurement, while Circular 111 provides the detailed implementation measures and guidelines applicable to Shanghai.

On 2 December 2011, the SAT issued the “Announcement on Issues related to the Recognition of VAT General Taxpayer Status in Pilot Program for the Transformation from BT to VAT in Shanghai (SAT Announcement (2011) No.65). The recognition of general VAT taxpayer is detailed stipulated as follows:

1. The following enterprises are obligated to apply for the qualification of general VAT taxpayer:

a) Taxpayers with an annual sales value exceeding RMB 5 million earned from engaging in the taxable services under the pilot program;
b) Taxpayers with an annual sales value below RMB 5 million, but newly established their businesses,can apply to be recognized as general taxpayers when satisfying certain requirements of competent tax authority.

2. The following enterprises could be regarded as general VAT taxpayer by competent tax authorities directly without any reapplication procedure:

a) Taxpayers that have already obtained general taxpayer status and provide VAT-able services under the pilot program;
b) Taxpayers engaged in land or inland water transportation of cargo, at the same time as an invoice issuing taxpayer, and passed the 2011 annual audit.

Shanghai Finance Bureau and Shanghai Administration of Taxation made further explanation on some detailed points related to the Pilot VAT Measurement, we may draw your attention to the followings:

1. Specifying the scope of pilot program in Shanghai: Pilot industries do not include architecture industry, post and telecommunication industry, sales of immovable properties as well as restaurants and entertainment industry etc.

2. For the small scale VAT taxpayer in Shanghai provides transportation services to the pilot VAT taxpayers or original general VAT taxpayer, the input VAT could be calculated by the formula: Input VAT = Deduction rate (7%) x (Original price + tax total stated in special VAT invoices issued by the pilot VAT taxpayer or the general VAT taxpayer).