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China: VAT reform of telecommunications sector

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 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 (
KPMG, China and Hong Kong SAR
Tel: +86 (10) 8508 7082

Lewis Lu (
KPMG, Central China
Tel: +86 (21) 2212 3421

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