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China: China’s VAT zero-rating concession for exported service scope expanded

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Khoonming Ho

Lewis Lu

On October 30 2015 China's Ministry of Finance (MoF) and State Administration of Taxation jointly issued Circular Caishui [2015] 118 (Circular 118) which introduces value added tax (VAT) zero-rating for certain exported services, to replace the existing VAT exemption treatment. VAT zero-rating means that a taxpayer not only does not pay VAT on the services it performs, but is also entitled to full input VAT credits (and if applicable, refunds) for the expenses it incurs which relate to providing those services.

The three categories of services affected by the new VAT zero-rating treatment comprise:

1) offshore outsourcing services (consisting of information technology outsourcing (ITO) services, technical business process outsourcing (BPO) services and technical knowledge process outsourcing (KPO) services);

2) radio, television and film production and publishing services; and

3) technology transfers, software services, circuit design and testing services, information system services, business process management services and energy management services (except where the object of the energy management contract is located in mainland China) provided to overseas entities.

Circular 118 will be greeted favourably by taxpayers, and marks a further shift in China's VAT system conforming with international norms. According to the OECD's 'International VAT/GST Guidelines' (April 2014), exports should "not be subject to tax with a refund of input taxes" (that is, zero-rating should apply). The MoF has recently indicated its objective is for zero-rating to apply to all exported services. It is therefore expected that this change merely represents the first stage in that shift, though Circular 118 is silent on the timeline for any further changes.

Until now, the categories of zero-rated services in China have been relatively limited for exported services – it has only applied to research and development, design services and certain international transportation services. Circular 118 now expands the scope of zero-rated exported services, which means that taxpayers can claim related input VAT credits (and refunds, where applicable) on those services, when previously such input VAT credits were required to be denied or transferred out.

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

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