PRC Tentative Regulations on Value-added Tax (Revised)

(Promulgated by the State Council on November 10 2008 and effective as of January 1 2009.)

Order of the State Council No.538

Article 1: Work units and individuals that sell goods, provide processing or repair and replacement services or import goods in the PRC shall be payers of value-added tax and shall pay value-added tax in accordance with these Regulations.

Article 2: The value-added tax rates shall be as set forth below:

(1) The tax rate for goods sold or imported by taxpayers other than the goods set forth in Items (2) and (3) of this Article shall be 17%.

(2) The tax rate for sale or import of the following goods by taxpayers shall be 13%:

(i) grains, edible vegetable oil;

(ii) tap water, central heating, air-conditioning, hot water, town gas, liquefied petroleum gas, natural gas, methane, and coal for residential use;

(iii) books, newspapers, magazines;

(iv) feed, chemical fertilizers, pesticides, agricultural machinery, mulching films; and

(v) other goods as specified by the State Council.

(3) The tax rate on goods exported by taxpayers shall be zero, except where otherwise specified by the State Council.

(4) The tax rate on processing and repair and replacement services provided by taxpayers (Taxable Services) shall be 17%.

Adjustments to the tax rates shall be determined by the State Council.

Article 3: Taxpayers that concurrently deal in goods or provide Taxable Services subject to different tax rates shall separately calculate the sales turnovers for the goods or Taxable Services subject to different tax rates. Where the sales turnovers are not calculated separately, the highest tax rate shall apply.

Article 4: Subject to Article 11 of these Regulations, the amount of tax payable on the sale of goods or provision of Taxable Services (Sale of Goods or Taxable Services) by taxpayers shall be the balance of the output tax amount for the current period after setting off the input tax amount for the current period. The formula for calculation of the amount of tax payable is set forth below:

amount of tax payable = output tax amount for the current period – input tax amount for the current period

If the input tax amount for the current period cannot be fully deducted from the output tax amount for the current period because the latter amount is smaller than the former, the balance may be carried over to the next period for continued deduction.

Article 5: The amount of value-added tax calculated in accordance with the sales turnover and the tax rates provided in Article 2 hereof and collected from purchasers for the Sale of Goods or Taxable Services by taxpayers, shall be the output tax amount. The formula for calculation of the output tax amount is set forth below:

output tax amount = sales turnover x tax rate

Article 6: The sales turnover shall be the full price and all additional charges that are collected by the taxpayer from the purchaser for the Sale of Goods or Taxable Services, but shall not include the collected output tax amount.

Sales turnovers shall be calculated in renminbi. Taxpayers that settle the sales turnovers in a foreign currency other than renminbi shall calculate the turnovers by converting them into renminbi.

Article 7: If a taxpayer's price for the Sale of Goods or Taxable Services is obviously low without legitimate reason, the tax authority in charge shall determine the taxpayer's sales turnover.

Article 8: The value-added tax paid or borne by taxpayers for the purchase of goods or for being provided Taxable Services (Purchase of Goods or Taxable Services), shall be the input tax amount.

The following input tax amounts may be deducted from the output tax amounts:

(1) the value-added tax amount indicated on the dedicated value-added tax invoice obtained from the seller;

(2) the value-added tax amount indicated on the customs import value-added tax payment demand obtained from customs;

(3) on the purchase of agricultural products, unless a dedicated value-added tax invoice or customs import value-added tax payment demand has been obtained, the input tax amount shall be calculated based on the purchase price for the agricultural products indicated on the agricultural product purchase or sale invoice and a 13% deduction rate. The formula for calculation of the input tax amount is set forth below:

input tax amount = purchase price × deduction rate; and

(4) if a freight charge is paid in the course of the sale or purchase of goods or in the course of production and operations, the input tax amount shall be calculated based on the freight charge indicated on the freight settlement document and a 7% deduction rate. The formula for calculation of the input tax amount is set forth below:

input tax amount = freight charge × deduction rate

Revisions of the deductible items and the deduction rates shall be determined by the State Council.

Article 9: If a taxpayer makes a Purchase of Goods or Taxable Services and the value-added tax deduction document that it obtained in connection therewith does not comply with laws, administrative regulations or relevant provisions of the State Council's department in charge of tax, the input tax amount may not be deducted from the output tax amount.

Article 10: The following input tax amounts may not be deducted from the output tax amounts:

(1) Purchases of Goods or Taxable Services used for items not subject to value-added tax, items exempt from value-added tax, collective welfare or personal consumption;

(2) purchases of goods in respect of which extraordinary losses are incurred, and related Taxable Services;

(3) Purchases of Goods or Taxable Services used for goods in process or finished products in respect of which extraordinary losses are incurred;

(4) consumer goods used by taxpayers themselves as specified by the State Council's departments in charge of finance and tax; and

(5) freight charge for the goods specified in Items (1) to (4) of this Article and freight charge for goods sold duty free.

Article 11: The simplified method wherein the tax payable is calculated based on the sales turnover and the tax rate shall apply to small taxpayers that make Sales of Goods or Taxable Services. They may not deduct the input tax amount. The formula for calculation of the tax payable is set forth below:

tax payable = sales turnover × tax rate

The criteria for small taxpayers shall be specified by the State Council's departments in charge of finance and tax.

Article 12: The rate of value-added tax for small taxpayers shall be 3%.

Adjustments to the rate shall be determined by the State Council.

Article 13: Taxpayers other than small taxpayers shall apply to the authority in charge of tax for recognition of their status. The specific measures for recognition shall be formulated by the State Council's department in charge of tax.

A small taxpayer that practises sound accounting and is able to provide accurate tax information may apply to the authority in charge of tax for recognition of its status, in which case it shall not be treated as a small taxpayer and shall calculate its tax payable in accordance with the relevant provisions hereof.

Article 14: The tax payable on goods imported by taxpayers shall be calculated in accordance with the composite price for taxation purposes and the tax rate provided in Article 2 hereof. The formulas for calculation of the composite price for taxation purposes and the tax payable are set forth below:

composite price for taxation purposes = dutiable value + duty + consumption tax

tax payable = composite price for taxation purposes × tax rate

Article 15: The following items shall be exempt from value-added tax:

(1) agricultural produce sold by the agricultural producers that produced them;

(2) contraceptive pharmaceuticals and devices;

(3) antique books;

(4) imported instruments and equipment to be used directly in scientific research, scientific experimentation or teaching;

(5) imported supplies and equipment given gratis in aid by foreign governments and international organisations;

(6) articles for the specific use of disabled persons that are imported directly by disabled persons' organisations; and

(7) articles sold after having been used by the seller.

Items that are exempt from value-added tax or entitled to value-added tax reduction other than those set forth in the preceding paragraph shall be determined by the State Council. No regions or departments may determine items exempt from tax or entitled to tax reduction.

Article 16: Taxpayers that concurrently deal in items that are exempt from tax or entitled to tax reduction shall separately calculate the sales turnovers of the items exempt from tax or entitled to tax reduction. Where the sales turnovers are not calculated separately, no exemption or reduction of tax may be granted.

Article 17: If the sales turnover of a taxpayer is below the threshold for the levy of value-added tax specified by the State Council's departments in charge of finance and tax, the taxpayer shall be exempt from value-added tax. If the sales turnover reaches the threshold, the taxpayer shall calculate and pay the entire amount of the value-added tax in accordance herewith.

Article 18: If a work unit or individual outside the People's Republic of China provides Taxable Services in China but does not have a business establishment in China, its agent in China shall be its withholding agent. If it does not have an agent in China, the buyer shall be its withholding agent.

Article 19: A value-added tax obligation shall arise at the following times:

(1) for a Sale of Goods or Taxable Service, on the date the sales amount is received in full or the voucher with which the sales amount can be demanded is obtained; where an invoice is first issued, on the date on which the invoice is issued; and

(2) for imported goods, on the date that the customs declaration is made and the goods are imported.

A value-added tax withholding obligation shall arise on the date that the taxpayer's value-added tax obligation arises.

Article 20: Value-added tax shall be levied and collected by the tax authorities. Value-added tax on imported goods shall be collected by customs on behalf of the tax authorities.

Value-added tax on articles that are carried or mailed into China by individuals for their own use shall be calculated and levied together with customs duties. The specific measures therefor shall be formulated by the Tariff/Tax Regulation Committee of the State Council in conjunction with relevant departments.

Article 21: A taxpayer shall issue a dedicated value-added tax invoice for the Sale of Goods or Taxable Services to the purchaser requesting it, and shall separately specify on such invoice the sales turnover and the output tax amount.

No dedicated value-added tax invoice may be issued under any of the following circumstances:

(1) in case of Sale of Goods or Taxable Services to individual consumers;

(2) where tax exemption provisions apply to the Sale of Goods or Taxable Services; or

(3) in case of Sale of Goods or Taxable Services by small taxpayers.

Article 22: Value-added tax shall be paid at the following places:

(1) an entity with a fixed place of business shall file its tax returns with and pay tax to the tax authority in charge at the place where its establishment is located; if the head office and branch(es) are in different counties (cities), tax returns shall be filed with and tax paid separately to the tax authorities in charge of the places where they are located; following approval by the State Council's departments in charge of finance and tax or by a finance and a tax authority authorised by them, the head office may file tax returns with and pay tax on a consolidated basis to the tax authority in charge at the place where it is located;

(2) an entity with a fixed place of business that makes a Sale of Goods or Taxable Services in another county (city) shall apply for issuance of a tax administration certificate for business activities outside the county (city), and file its tax returns with and pay tax to the authority in charge of tax of the place where its establishment is located; if such certificate was not issued, it shall file its tax returns with and pay tax to the tax authority in charge at the place where the sale was made or the services were provided; if it fails to file tax returns with and pay tax to the tax authority in charge at the place where the sale was made or the services were provided, the tax authority in charge at the place where its establishment is located shall then levy the tax;

(3) an entity without a fixed place of business that makes a Sale of Goods or Taxable Services shall file its tax returns with and pay tax to the authority in charge of tax at the place where the sale was made or the services were provided; if it fails to file tax returns with and pay tax to the authority in charge of tax at the place where the sale was made or the services were provided, the tax authority in charge at the place where its establishment is located or resident shall then levy the tax; and

(4) tax returns shall be filed with and tax paid to customs of the place of customs declaration for imported goods.

A withholding agent shall file tax returns and pay the withheld tax to the authority in charge of tax at the place where its establishment is located or resident.

Article 23: The terms for payment of value-added tax shall be one day, three days, five days, 10 days, 15 days, one month or one quarter, respectively. Taxpayers' specific terms of tax payment shall be determined by the tax authorities in charge on the basis of the size of the taxpayers' amounts of tax payable. Taxpayers that cannot pay tax according to fixed terms may pay tax each time the liability to pay tax arises.

Taxpayers whose term of tax payment is one month or one quarter shall file a tax return and pay tax within a period of 15 days commencing from the date of expiration of the term. Taxpayers whose term of tax payment is one, three, five, 10 or 15 days shall prepay the tax within a period of five days commencing from the date of expiration of the term and, within a period of 15 days commencing from the first day of the next month, file a tax return and settle in full the amount of tax payable for the preceding month.

The deadline for which withholding agents shall turn over the tax withheld shall be handled in accordance with the preceding two paragraphs.

Article 24: When a taxpayer imports goods, it shall pay the tax amount within 15 days from the date of issuance of the customs import value-added tax payment demand by customs.

Article 25: If tax refund (exemption) provisions apply to goods exported by a taxpayer, it shall carry out export procedures with customs and carry out the tax refund (exemption) procedures for the exported goods with the authority in charge of tax on a monthly basis by the specified deadline for the filing of tax refunds (exemptions) on the strength of the export customs clearance note and other such documents. The specific measures therefor shall be formulated by the State Council's departments in charge of finance and tax.

If exported goods are returned or shut out after tax has been refunded, the taxpayer shall make up the tax refunded in accordance with the law.

Article 26: The levy and collection of value-added tax shall be carried out in accordance with the PRC Law on the Administration of the Levy and Collection of Taxes and relevant provisions hereof.

Article 27: These Regulations shall be effective as of January 1 2009.