General

VAT/GST registration

VAT/GST compliance

VAT/GST recovery

Invoices

Special indirect tax rules

Rulings

Other indirect taxes

Contacts

Type of indirect tax:

VAT.

Standard rate:

13 percent (VAT), though other rates of 3 percent, 6 percent and 9 percent commonly apply.

What supplies are liable to the standard rate?

• sale and importation of goods
• provision of repair, replacement and processing services
• leasing of tangible and moveable assets.

Are there any reduced rates, zero- rates or exemptions and if so, what do they apply to?

• 3 percent: ‘small-scale taxpayers,’ being those without sophisticated businesses, accounting and auditing systems and whose turnover is below certain thresholds (discussed below); and certain transactions subject to the simplified levy method. These small-scale taxpayers pay output VAT at 3 percent, but cannot claim input VAT credits.
• 6 percent: ‘modern services’ (research, development and technical services; information technology services; cultural and creative services; logistics and ancillary services; leasing of tangible moveable assets; certification and consulting services; radio, film and television services), value-added telecommunications services; financial and insurance services; and ‘lifestyle services’ (education; healthcare; travel; entertainment; food and beverage; accommodation; citizens daily services; and cultural and sports services).
• 9 percent: transportation services; postal services; basic telecommunication services; and real estate and construction (though many real estate and construction transactions are subject to reduced rates of VAT pursuant to transitional or grandfathering rules from 1 May 2016).
• 9 percent: the sale of food grains and vegetable oils; heating; air conditioning; certain gas supplies; books; newspapers and magazines.
• Zero-rated: exported goods; and certain exported services (though most exported services are exempt, not zero-rated).
• Exempt: agricultural products; contraceptive drugs and devices; antique books and other items declared by the State Council; and a number of exported services.

The Special Administrative Regions of Hong Kong and Macau do not have VAT or equivalent indirect taxes.

Who is required to register and what is the threshold?

Business taxpayers may register as ‘general VAT taxpayers’, which entitles them to claim input VAT credits and issue VAT special invoices. All other businesses are classified as ‘small-scale taxpayers’ and pay VAT at 3 percent, with no eligibility for input tax credits on purchases and in principle no eligibility to issue VAT special invoices (which are needed for business recipients to claim input VAT credits). Registration as a general VAT taxpayer is compulsory if the annual turnover exceeds CNY5 million.

The VAT liability threshold for individuals registering as 'small-scale taxpayers’ varies between regions and ranges from sales of CNY5,000 to CNY20,000 per month or CNY300 to CNY500 per transaction.

Is voluntary registration possible?

Yes.

It is possible for taxpayers that would otherwise be below the thresholds to register as ‘general VAT taxpayers.’ They need to demonstrate a sound accounting system and provide accurate tax information as well as have a fixed place of business in China and be approved by the tax authority.

Is voluntary registration available for an overseas company or a fiscal representative?

No, overseas companies are not generally permitted to register for Chinese VAT purposes.

What is the typical frequency of returns?

Monthly is the norm, however, banks, trusts and certain finance companies file returns quarterly. In other special cases, returns may be required more frequently; in some cases, as often as daily.

Are there any items that a registered business cannot recover VAT on?

Yes.

There are a number of restrictions on the recovery of input tax credits. The most significant of which is that only general VAT taxpayers are potentially eligible to claims supported by VAT special invoices. As such, assuming the taxpayer is a ‘general VAT taxpayer’ and holds a special VAT invoice, then further restrictions include an inability to claim for:

• inputs related to activities subject to the simplified levy method
• inputs related to the sale of tax-exempt items
• inputs related to group welfare activities (e.g. employee canteens and employee benefits)
• inputs related to food and beverage and entertainment services
• inputs related to interest expenses
• items for personal consumption
• inputs used in deriving extraordinary or abnormal losses.

For completeness, it should also be noted that many exports of goods do not result in the full recovery of input VAT. That is, there may be a leakage in export VAT recovery, which varies depending on the HS Customs code of the goods being exported.

Can an overseas company recover VAT if it is not registered?

No.

How long does it typically take to obtain a VAT refund following a return filing?

Where input tax exceeds output tax in any given period, generally the excess input tax credit must be carried forward (potentially indefinitely).

The main exceptions to this are for exported goods and certain exported services which are zero-rated.

There is no prescribed timeline in relation to the refunds of input VAT for such zero-rated exported goods and services. First-time providers can be required to wait 6 months or longer before they receive the refund.

Furthermore, since 1 April 2019, a VAT refund mechanism on a ‘trial basis’ has been introduced to allow other businesses (i.e. not those exporting) to claim refunds of excess input tax credits where certain conditions are met.

Are there specific requirements for the content of invoices to be considered valid for VAT purposes?

Yes.

China operates the ‘Golden Tax System’, which is a highly regulated invoicing system. VAT invoices (known as special VAT invoices) must be issued on government-issued and regulated machines using government-issued and numbered invoicing paper. Businesses must obtain a special VAT invoice and verify it before an input VAT credit can be claimed.

As of 1 April 2019, businesses are generally entitled to claim input tax credits on domestic passenger transportation expenses on the basis of certain alternative travel documents, provided that certain details (e.g. passenger name and ID) are included on those documents.

Does a reverse charge or indirect tax withholding mechanism apply?

Yes, a VAT withholding system applies where services are provided by an overseas party to a business or individual (or an agent) in China.

Is it possible to apply for formal or informal advance rulings from the tax authority?

No, however, the Chinese tax authorities are implementing an advance tax rulings system, though it is not yet in widespread use.

Are there any other indirect taxes that apply in the jurisdiction?

Other indirect taxes include the following:

• consumption tax, which applies to the manufacturing, processing, importation or selling of 14 different kinds of goods (principally luxury goods)
• customs duty
• stamp duty
• various local levies
• various real estate-specific taxes, motor vehicle taxes and mining-specific taxes.

Lachlan Wolfers
KPMG China
T: +852 2685 7791
E: lachlan.wolfers@kpmg.com

All information within this guide is provided by KPMG professionals in China and based on information available as of September 2019.