The State Administration of Taxation (SAT) issued Announcement 13 to set out the circumstances under which the transfer of tangible goods may not be subject to VAT in a corporate restructuring.
However, it is not apparent if this announcement is only meant for the transfer of businesses in place of equity interests. There is also uncertainty in a number of key areas such as the utilisation of unused input tax credits before the restructuring.
To qualify for the relief the taxpayer must transfer the goods through a merger, demerger, sale or swap and the taxpayer must transfer all or part of the tangible assets together with related debt claims, liabilities and work force to other units or individuals.
“The rules seem to be too loose as there is not any minimum requirement on the amount of assets that will be transferred or any limit on the cash consideration for the transaction concerned,” said Roger Di, of KPMG in Beijing.
Announcement 13 distinguishes between the transfer of the whole or part of a business as a going concern and the separate sales of the underlying tangible goods. While the latter falls within the scope of VAT, the former does not.
China’s VAT rules state there should be a taxable transaction as long as the ownership of goods is transferred. This implies that the SAT takes the view that there is no actual transfer of ownership of the underlying assets in a qualified corporate restructuring.
The release of the announcement abolishes all previous circulars covering this topic including circulars 350 and 420.
The document does not address the issue of whether VAT invoices should allow unused input tax credit of one party to be allowed against the output tax of the other party after the restructuring.
“It [The announcement] does not make clear if taxpayers can elect to treat the asset transfer as being subject to VAT,” said Di.
The rules are effective from March 1. However, if the matter has not been dealt with before then there is no need to go back to previous years and make up the VAT payments.
It is not clear if transactions before January 1 2009 should follow the rules if no VAT has been paid.
“This question is pertinent because Announcement 13 was released after the revised VAT regulations and rules took effect from January 1 2009,” said Di.
These uncertainties are likely to be addressed by the SAT later this year. Taxpayers are advised to speak to the SAT to discuss the VAT implications of a corporate restructure.
The SAT are expected to apply similar rules to intellectual property, land use right and buildings in restructures.
