As a type of turnover tax, value-added tax (VAT) is levied on the increased value of commodities at different stages of production or circulation, i.e. the value-added on the commodities throughout the supply chain until the final customer bears the burden of the tax for the whole production process. All enterprises or individuals engaged in the sale of or import of goods or the provision of processing, repair or maintenance services in China have to pay VAT.
In China, the VAT system is separated into two taxpayer divisions:
VAT is divided into three categories:
This refers to taxpayers who cannot maintain a proper accounting and auditing system - due to their small size and turnover to ensure accurate calculations of Input, Output and Payable VAT.
The taxable sales value of these entities is under the following standard:
The VAT payable by the small-scale taxpayers is calculated on the basis of the sales value without the deduction for Input VAT. The applicable tax rate is 4% for commercial enterprises and 6% for other sectors.
Once the small-scale taxpayers grow, they may apply for the Ordinary Taxpayer Certificate, if either
However, small production companies who have proper accounting and auditing systems may be classified as small-scale taxpayers. Enterprises, whereby the annual taxable sales value exceeds small-scale taxpayers, however are not regularly engaged in taxable operation will be classified as small-scale taxpayers.
This refers to enterprises whose annual taxable sales value exceeds that of small-scale taxpayers.
The VAT payable by the general taxpayers is calculated on the basis of:
Output VAT (sales value x VAT rate) - Input VAT (purchase value x VAT rate).
If the Output VAT is smaller than the Input VAT, the amount cannot be fully deducted therefore it can be carried to the following tax period as VAT Tax is paid on a monthly basis.
VAT Tax Rates
For general Tax payers, there are two VAT tax rates, the basic rate of 17% and a lower rate of 13% which is for the import or sales of the following products:
Special VAT Invoices
General Taxpayers selling taxable items must issue special VAT invoices to the buyer. However, for the sale of taxable items to consumers and the sale of duty-free goods or goods for export, no special VAT invoices have to be issued (unless the consumer requires one). It is also not mandatory to issue special VAT invoices for the sale of taxable items to small-scale taxpayers. Small-scale taxpayers and non-VAT taxpayers (those that do not sell goods onto the local market because they are only exporting overseas) may not purchase or use these VAT invoices.
Enterprises that have been granted approval as General Taxpayers, may apply to the tax bureau for the VAT invoices.
Enterprises must have:
Liability and Payment Period
In the supply of goods or taxable services, the VAT liability arises on the day the taxpayer receives full payment for the transaction or obtains a payment voucher for the transaction. In the case of import goods, VAT liability arises on the day of customs declaration.
The payment period is during the tax filing period of the following month. In most cases the Balance Sheet and P&L need to be included together with the VAT tax return. Specific calculations need to be made once the VAT is to be submitted.
Summary of VAT Invoicing in China
In order to summarize the VAT Invoicing in China, we have taken the example of either a trading or manufacturing company established in China:
The company buys raw materials from the local market and VAT is already included into the buying price. The suppliers pay for the VAT to the tax bureau directly.
If raw materials are imported from overseas, the customs duty must be paid with the Input VAT to the tax bureau by the company.
If the products are sold onto the local market, VAT must be included into the selling price. The company must obtain the approval to issue VAT invoices and once the VAT invoice is issued, the company must pay the tax to the tax bureau.
If the products are exported overseas, VAT is not included into the selling price. The company should apply for VAT refund, which was already paid by the suppliers in buying the raw materials or by the company in importing the raw materials. See below under VAT Refund.
Any company that is registered in China, needs to also register with the Customs Bureau in order to obtain a Customs Handbook. This Customs Handbook will be used to control the imported raw materials and the export of the finished goods overseas. If the raw materials used matches with the finished goods exported, then no VAT or Customs Duty will need to be paid.
Calculation and Application of the VAT Refund
The Chinese government still provides incentives to encourage companies to export and therefore there is generally no Output VAT on export sales and the related Input VAT may be refunded. Refunded export VAT rates differ according to the category in which the product falls in (13%, 11%, 8%, 5% and 0%).The export refund system in China has caused many difficulties for Foreign Invested Enterprises due to the insufficient finances to refund the high demand of VAT rebates that have been applied for.
VAT incurred during the process of domestic production or provision of taxable services, may be refunded by the Chinese government after the specific product has been exported if export tax rebate policies and procedures are applied for in the proper way.
Companies that are eligible for the VAT refund are:
There are two tax refund methods that can be used:
In order to qualify for export refund applications, a company must first obtain its VAT refund registration certificate. After a company has exported products eligible for export VAT refund, an application needs to be filed with the relevant tax bureau in charge. Enterprises should file their application for the refund within 90 days after the export date specified on the customs declaration form.
Manufacturing companies that provide processing and repair services to overseas firms also need to submit relevant processing and repair service contracts to the tax authority in charge.
In the event that the enterprise does not apply for the refund in time, the company must accrue Output VAT and file the VAT return accordingly. However, if the company can provide reasonable justification for requesting an extension, it may do so. However this extension may only be approved by a higher tax authority and could cause delays.
Zones and Bonded Logistics Parks
Generally, if the company is located in a zone, then they will be able to have Customs Duty and Input VAT free and this will only be paid once the goods are sold onto the local market. If the goods are directly exported overseas, then no Customs or VAT will ever have to paid, but it is essential that the company has the Customs Handbook so that this can be controlled accordingly.
Bonded Logistics Park
A reviewed tax rebate mechanism creates one of the attractions for foreign companies to use the logistics services offered in the Parks. When goods are delivered into the logistics park, the cargo is considered exported and the supplier or agent can immediately apply for the VAT refund. Until now, the application outside of the logistics park is such that the documents can only be submitted after the shipment has physically left China. (For more information, please look at our November 2004 issue)
Whether you are only exporting goods for the moment or whether you are planning, in the long term to sell goods onto the local market, companies should plan on applying for VAT invoices and should incorporate their China company according to the guidelines provided. It is advised to check with each zone, district, city or provincial government in regards to what they recommend for registered capital and sales turnover.
Companies should also structure their entities to incorporate VAT refund policies and again should contact government bureaus to understand the calculations and possibilities.
All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.
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