China: VAT essentials guide for 2021

China: VAT essentials guide for 2021

A value added tax (VAT) essentials guide from KPMG provides key information about China’s VAT system (in English language) and explains many of its core principles.

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The information set out in the China VAT essentials guide addresses what are viewed as being the most common instances—what can make China’s VAT system challenging are myriad exceptions that may apply based on specific or local policies and practices.

There appears to be an intention for greater alignment between China’s VAT system and the VAT/GST systems in common usage around the world. For example, the 2021 guide highlights important developments with VAT refunds and simply limiting refunds to exporters (as was the case previously).

Also on the horizon is a nationwide rollout of electronic invoicing—which initially began with business-to-consumer (B2C) transactions, before being piloted for new businesses with business-to-business (B2B) transactions in early 2021. This development will accelerate the shift away from paper-based invoicing, and may allow for cost-saving opportunities for businesses through a reduction in manual invoicing processes, and also allow businesses to consider outsourcing this function (together with their VAT return filing processes).

China has retained certain unique features of its VAT system, which differentiate it from many major VAT/GST systems used in other parts of the world. For example:

  • China maintains a multiple VAT rate system—3%, 6%, 9% and 13%—though the prospect of further rationalisation of these rates cannot be discounted in the near future.
  • Most exported services are exempted from VAT (not zero-rated). While exported goods qualify for zero-rating, the refund rate applicable to the inputs (e.g., raw materials) used in the production of those goods may be less than the VAT incurred (i.e., there is an embedded cost).
  • Non-residents without a presence in China are unable to register for VAT purposes, and therefore similarly unable to claim a refund of any VAT incurred on inputs.
  • A VAT withholding system applies (instead of a reverse-charge) where services are provided by an overseas party to a business or individual (or an agent) in China.
  • Bad debts are generally ineligible for relief, meaning that a liability to pay output VAT can still arise even though the corresponding fee is never received from the customer.
  • Gifts and other products or services given away may be liable to output VAT, even where the parties are not associated.
  • China is yet to implement specific measures to require non-residents to account for VAT on digital services provided to consumers in China, though in reality due to regulatory, language and consumer preferences, there is a greater level of usage of domestic digital providers as compared to many other countries (meaning that such rules are not as necessary).
  • Financial services are subject to VAT as the default position, with any exemptions or exclusions being relatively narrowly applied.
  • The concept of carrying on a business (or similar) as a prerequisite to being brought within the VAT regime does not exist in China. Instead, liability to VAT is generally dependent on meeting a turnover threshold. This means that certain C2C transactions involving real estate may be within the VAT net in China.

In 2021 and 2022, it is expected that China will be upgrading the status of its current VAT rules-based system into a formally enacted law, and it remains to be seen the extent to which this will be accompanied by further substantive changes to the VAT system.


Read the KPMG VAT guide for China (2021) [PDF 1.1 MB] 

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