China: VAT reform of telecommunications sector

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

China: VAT reform of telecommunications sector

Sponsored by

sponsored-firms-kpmg.png
AdobeStock_128948307_telecoms

On April 29 2014 China's Ministry of Finance and State Administration of Taxation jointly issued Circular Caishui [2014] 43 (Circular 43) which provides for the entry into force of the Value Added Tax (VAT) reforms of the telecommunications sector, effective from June 1 2014.

khoonming.jpg

lu.jpg

Khoonming Ho


Lewis Lu

The telecommunications sector in China is heavily regulated, and many had expected that the scope of Circular 43 would largely be limited in its application to the three major state-owned enterprises, China Mobile, China Telecom and China Unicom. However, Circular 43 is significantly broader in its application, and includes key rules which impact on (among others):

  • Foreign telecommunications providers; and

  • The digitised services industry.

Under Circular 43, the 11% VAT rate for basic telecommunications services and the 6% VAT rate for value-added telecommunications services both replace the current 3% business tax (BT) rate. The adoption of an 11% VAT rate for basic telecommunications services is likely to cause an increase in the overall tax burden for the major telecommunications carriers, at least in the short term. The question of whether the replacement of a 3% BT rate with a 6% VAT rate for value-added telecommunications services is likely to increase or decrease the tax burden impact will likely depend on a range of factors, such as the extent of capital inputs relative to staff costs, and whether their customer base are VAT taxpayers or end-consumers.

Circular 43 contains a specific provision under which telecommunications services (both basic and value-added) provided by Chinese entities to overseas entities are exempt from VAT. Unlike the OECD's recently released International VAT/GST Guidelines (dated April 17-18 2014) which recommends zero-rating, the concession granted for outbound telecommunications services in China is one of exemption from VAT. This means that Chinese telecommunications carriers need to identify their costs and expenses specifically relating to their exempt supplies and deny (or transfer out) any related input VAT credits, and apportion their input VAT credits for its general overhead costs. The distinction between exemption from VAT in China and zero-rating is not as pronounced as it is internationally, due to a specific concession which preserves the entitlement to claim full input VAT credits for fixed assets used in a business of making only partially taxable sales.

Importantly though, Circular 43 contains no comparable provision relating to telecommunications services provided by overseas entities to Chinese entities. This comes as a real surprise.

Circular 43 provides that digitised services fall within the scope of VAT, most commonly at a 6% VAT rate. Consequently, where a Chinese provider of digitised services sells music or video downloads or e-books, or provides online gaming services, then VAT is clearly payable. However, the position of foreign providers remains unclear as a matter of practice.

Circular 43 is relatively light on detail. There are a number of aspects of the Circular likely to give rise to interpretational uncertainties, and there are a number of key technical and industry issues not yet dealt with in the Circular. It is therefore likely, in our view, that further Circulars will be issued over time. This does not diminish, but rather adds to, the challenges industry will have in implementing the transition to VAT in the short term.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

more across site & shared bottom lb ros

More from across our site

FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Representatives from the two countries focused on TP as they met this week to evaluate progress under a previously signed agreement – it is understood
The UK accountancy firm’s transfer pricing lead tells ITR about his expat lifestyle, taking risks, and what makes tax cool
Dolphin Drilling intends to discuss the final liability amount and manner of settlement with HM Revenue and Customs
Winning the case against the 20% VAT imposition was always going to be an uphill challenge for the claimants, UK tax advisers argue
Gift this article