In response to the slowdown, the Chinese government has
already introduced a string of stimulatory tax-cut measures,
such as corporate income tax (CIT) reductions for small
enterprises. During the 'two-sessions meeting' of China's
Parliament in March, China unveiled further tax cut measures
worth RMB 2 trillion ($297 billion) for 2019.
We discuss below the VAT rate reductions and the measures to
improve the tax treatment for foreign personnel in China. These
constitute parallel efforts to support the economy through
stimulating domestic consumption, while also facilitating
further inbound enterprise activity.
VAT rate reductions
From April 1 2019, the main VAT rate, which is applied to
manufacturing and many other sectors, was reduced from 16% to
The 10% rate, which applies to transportation, construction,
telecoms, and other sectors, has been reduced to 9%. The rate
of 6%, which applies to a wide range of services, remains
These come on top of recent reductions in the VAT rates,
with the standard rate already down from 17%. The middle rate
was previously 13% and 11% for different services. It is
expected that in 2019 and 2020, the number of VAT rates will be
consolidated from three (6%, 9% and 13%) to two.
In a further step, the authorities have moved to better
align China VAT rules with OECD principles and best practices,
particularly in relation to refunds for excess input VAT
A long-standing challenge with China VAT management has been
the inability to claim refunds of excess input VAT credits,
except to the extent those exports are zero-rated. Generally,
it has only been possible to carry forward excess input VAT
credits to offset output VAT in future tax periods.
Careful tax advisory is needed to avoid entities or branches
within corporate groups that end up with 'trapped' input credit
balances that can never be used. This would mean a real
business cost from VAT, which in principle is supposed to be a
tax on end consumption, simply collected by businesses.
The situation has also caused considerable cash flow issues
for businesses, particularly for innovative start-ups that the
government views as the lifeblood of China's new economy.
To address this, a new trial basis VAT refund mechanism has
come into effect from April 1 2019. Eligibility criteria for
refunds have been detailed to include that a taxpayer must have
a high tax credit rating. This is based on a record of good
taxpayer compliance behaviour and the existence of a robust tax
This more formalised VAT refund mechanism, which covers all
enterprises, builds on a 2018 initiative to provide an one-off
refund for excess VAT input credits to certain targeted
VAT super deductions
In a novel rule which seems to have no international
precedent, from April 1 2019 to December 31 2021, a 10% VAT
'super deduction' will be provided for certain industries.
Taxpayers in the postal services, telecommunications
services, modern services and lifestyle services industries may
be eligible to increase their input VAT credits by a bonus 10%.
There are implications on interaction with CIT on which more
guidance is expected.
Foreign direct investment
In addition, the Chinese government is also looking to
stimulate inbound business activity by improving the tax
treatment of foreign personnel in China.
China's revised Individual Income Tax (IIT) Law is effective
from January 1 2019. In March 2019, the authorities provided
further beneficial guidance on the provisions affecting foreign
individuals working in China.
A key provision of the new IIT Law is that foreigners can
live long-term in China, but still not suffer Chinese IIT on
their foreign-sourced income. This is as long as they can
demonstrate a continuous 31-day absence once in a six-year
period. This six-year rule has replaced an earlier five-year
However, while in the past, a presence in China for part of
a day constituted presence for a whole day in this calculation,
it is now required that a full 24 hours is needed. Furthermore,
the six-year rule is to start from January 1 2019, meaning this
will reset the clock for foreigners who have already run up
some years in China.
At the same time, preferential IIT treatment is provided to
foreign nationals including persons from Hong Kong SAR, Macau
SAR and Taiwan regions, who work in nine cities in the Greater
Bay Area (GBA) of South China.
At present, certain cities in Guangdong look to give certain
'foreign talents' subsidies that bring their after-tax income
in line with what they would get in Hong Kong (i.e. a 15% IIT
outcome). The preferential IIT treatment exempts these
subsidies in order to facilitate these after-tax outcomes, and
runs from 2019 to 2023 for the cities of Guangzhou, Shenzhen,
Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and
It should be noted that while much recent policy work has
focused on tax-cut measures to boost the economy, this by no
means implies that China is lessening the rigour of its tax
For example, the Customs authorities announced in March
measures to ensure that a customs duty is paid on cross-border
royalties connected with goods imports. The new reporting
requirements on this matter sit alongside the increasing use of
big data tax analysis, taxpayer credit rating, exchange of tax
information, and other tools to drive high compliance,
alongside an optimised tax environment.
Khoonming Ho (email@example.com) and Lewis Lu (firstname.lastname@example.org)
Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421