Implementing Rules for the PRC Tentative Regulations on Value-added Tax (Revised)

Revised on October 28 2011. Latest revision can be found at: http://www.chinalawandpractice.com/Article/2945599/Implementing-Rules-for-the-PRC-Tentative-Regulations-on-Value-added-Tax-2nd-Revision.html

(Issued by the Ministry of Finance and State Administration of Taxation on December 15 2008 and effective as of January 1 2009.)

Order of the MOF and SAT No.50

Article 1: These Rules have been formulated pursuant to the PRC Tentative Regulations on Value-added Tax (the Regulations).

Article 2: For the purposes of Article 1 of the Regulations, the term “goods” means tangible movable property, including power, heat and gas.

For the purposes of Article 1 of the Regulations, the term “processing” means the acceptance of a commission to process goods, i.e. services whereby the commissioning party provides the raw materials and main materials and the commissioned party manufactures the goods as required by the commissioning party and charges a processing fee therefor.

For the purposes of Article 1 of the Regulations, the phrase “repair and replacement” means services whereby a commission is accepted to repair goods that are damaged or have ceased to function so as to restore them to their original state and cause them to resume their function.

Article 3: For the purposes of Article 1 of the Regulations, the phrase “sell goods” means the transfer of ownership of goods for consideration.

For the purpose of Article 1 of the Regulations, the phrase “provide processing or repair and replacement services” (Taxable Services) means the provision of processing or repair and replacement services for consideration, but excludes the processing or repair and replacement services provided to a work unit or family proprietorship by employees employed thereby.

For the purposes of these Rules, the phrase “for consideration” means the obtaining of money, goods or other economic benefits from the buyer.

Article 4: The following acts by a work unit or family proprietorship shall be deemed a sale of goods:

(1) delivery of goods to another work unit or individual for sale on its behalf;

(2) sale of goods on behalf of another;

(3) where a taxpayer has two or more establishments that are consolidated for accounting purposes, transferring goods from one establishment to another to be sold, unless the relevant establishments are in the same county (or city);

(4) use of self-produced goods or goods processed pursuant to a commission for items not subject to value-added tax;

(5) use of self-produced goods or goods processed pursuant to a commission for collective benefits or personal consumption;

(6) use of self-produced goods, goods processed pursuant to a commission or purchased goods as an investment and provision of the same to another work unit or family proprietorship;

(7) distribution of self-produced goods, goods processed pursuant to a commission or purchased goods to shareholders or investors; and

(8) giving of self-produced goods, goods processed pursuant to a commission or purchased goods to another work unit or individual without consideration.

Article 5: If a sale involves goods as well as services not subject to value-added tax, it is a mixed sale. Except as provided in Article 6 hereof, mixed sales by enterprises, enterprise-type work units or family proprietorships that engage in production, wholesale or retail sale of goods shall be deemed a sale of goods and value-added tax shall be paid thereon. Mixed sales of other work units and individuals shall be deemed the provision of services not subject to value-added tax and no value-added tax shall be paid thereon.

For the purposes of the first paragraph of this Article, the term “services not subject to value-added tax” means services subject to business tax that fall under the tax items for the transport industry, construction industry, finance and insurance industry, post and telecommunications industry, culture and sports industry, entertainment industry and service industry.

For the purposes of the first paragraph of this Article, the phrase “enterprises, enterprise-type work units or family proprietorships that engage in production, wholesale or retail sale of goods” includes work units or family proprietorships that engage in the production, wholesale or retail sale of goods as their core business and engage in the provision of services not subject to value-added tax as a sideline business.

Article 6: For the following mixed sales of taxpayers, the sales turnover of goods and the business turnover in services not subject to value-added tax shall be accounted for separately and value-added tax shall be calculated and paid on the sales turnover of goods, but no value-added tax shall be paid on the business turnover in services not subject to value-added tax; if the sales turnover of goods and the business turnover in services not subject to value-added tax are not accounted for separately, the tax authority in charge shall assess and determine the sales turnover of goods:

(1) the simultaneous sale of self-produced goods and provision of construction services; and

(2) other circumstances as specified by the Ministry of Finance and the State Administration of Taxation.

Article 7: If a taxpayer engages in tax items not subject to value-added tax as a sideline business, it shall separately account for the sales turnover of goods or Taxable Services and the business turnover in services not subject to value-added tax. If the sales turnover of goods or Taxable Services and the business turnover in services not subject to value-added tax are not accounted for separately, the tax authority in charge shall assess and determine the sales turnover of goods or Taxable Services.

Article 8: For the purposes of Article 1 of the Regulations, the phrase “sell goods, provide processing or repair and replacement services in the People's Republic of China (PRC)” means that:

(1) the point of departure or the location of the goods sold is in the PRC; or

(2) the provision of Taxable Services occurs in the PRC.

Article 9: For the purposes of Article 1 of the Regulations, the term “work units” means enterprises, administrative work units, public institutions, military work units, associations and other work units.

For the purposes of Article 1 of the Regulations, the term “individuals” means family proprietorships and other individuals.

Article 10: If a work unit leases or subcontracts its business to another work unit or individual, the taxpayer shall be the lessee or the subcontractor.

Article 11: If a taxpayer other than a small taxpayer (a General Taxpayer) refunds a value-added tax amount to a buyer due to a return of, or rebate on, goods sold, such amount shall be deducted from the output tax amount for the period during which the return of, or rebate on, goods sold occurred. A value-added tax amount recovered from the return of, or rebate on, purchased goods shall be deducted from the input tax amount for the period during which the return of, or rebate on, the purchased goods occurred.

If a return of, or rebate on, goods sold, an error in the issued invoice, etc. occurs after a General Taxpayer has sold goods or Taxable Services and issued a dedicated value-added tax invoice, a red-letter dedicated value-added tax invoice shall be issued in accordance with the provisions of the State Administration of Taxation. If a red-letter dedicated value-added tax invoice is not issued in accordance with provisions, the value-added tax amount may not be deducted from the output tax amount.

Article 12: The “additional charges” mentioned in the first paragraph of Article 6 of the Regulations shall include handling fees that are charged the buyer in addition to the price, as well as subsidies, funds, financing expenses, profit recovery, incentives, liquidated damages, late payment fines, default interest, damages, moneys collected on behalf of a third party, moneys advanced on behalf of a third party, packaging charges, rental charges for packaging, reserve charges, bonuses, freight, loading and unloading charges and other additional charges of whatever nature, but exclude the following:

(1) consumption tax withheld on consumer goods subject to consumption tax and processed pursuant to a commission accepted from another;

(2) freight charges advanced on behalf of a third party that satisfy both of the following conditions:

(a) a freight charge invoice is issued to the buyer by the carrier; and

(b) the taxpayer forwards the invoice to the buyer;

(3) funds of a governmental nature and administrative charges charged on behalf of a third party that satisfy all of the following conditions:

(a) funds of a governmental nature the establishment of which has been approved by the State Council or the Ministry of Finance and administrative charges the charging of which has been approved by the State Council or provincial level people's government or its competent finance or pricing department;

(b) at the time of the charging thereof, a fiscal receipt printed by the finance department at the provincial level or above is issued; and

(c) all of the moneys collected are paid into the treasury; and

(4) insurance premiums charged to the buyer at the time of the sale of the goods for insurance, etc. purchased on its behalf and the vehicle purchase tax and vehicle licence fee paid on behalf of the buyer and then collected from it.

Article 13: If, pursuant to Article 5 hereof, value-added tax is payable on a mixed sale, the sales turnover shall be the total of the sales turnover of the goods and the business turnover in services not subject to value-added tax.

Article 14: If a General Taxpayer, in selling goods or Taxable Services, adopts the pricing method wherein the sales turnover and the output tax amount are combined, the sales turnover shall be calculated using the following formula:

sales turnover = tax inclusive sales turnover ÷ (1 + tax rate).

Article 15: Where a taxpayer settles sales turnover in a currency other than the renminbi, it may use the median of the renminbi exchange rate either on the date that the sales turnover occurred or on the first day of that month when translating the sales turnover into renminbi. The taxpayer shall determine in advance which translation rate it is to use and, once determined, such rate may not be changed for one year.

Article 16: If a taxpayer's “price … is obviously low without legitimate reason” as specified in Article 7 of the Regulations or if the taxpayer carries out an act as specified in Article 4 hereof that is deemed a sale of goods but has no sales turnover, its sales turnover shall be determined in the following sequence:

(1) a determination based on the average selling price of the same type of goods sold by the taxpayer during the most recent period;

(2) a determination based on the average selling price of the same type of goods sold by other taxpayers during the most recent period; or

(3) a determination based on the composite price for taxation purposes. The formula for the composite price for taxation purposes is set forth below:

composite price for taxation purposes = cost × (1 + profit to cost ratio).

For goods subject to consumption tax, the consumption tax amount shall be added to the composite price for taxation purposes.

The term “cost” in the formula means, in the case of the sale of self-produced goods, the actual production cost, or, in the case of the sale of goods purchased from a third party, the actual procurement cost. The profit to cost ratio in the formula shall be determined by the State Administration of Taxation.

Article 17: The “purchase price” mentioned in Item (3) of the second paragraph of Article 8 of the Regulations shall include, when the taxpayer purchases agricultural products, the price indicated on the agricultural product purchase invoice or sales invoice and the tobacco tax paid in accordance with provisions.

Article 18: For the purposes of Item (4) of the second paragraph of Article 8 of the Regulations, the term “freight charge” means the freight charge indicated on the freight settlement document (including freight charges on provisionally administered rail lines and on dedicated rail lines) and payments into the construction fund, but excludes miscellaneous charges such as loading and unloading charges and insurance premiums.

Article 19: For the purposes of Article 9 of the Regulations, the term “value-added tax deduction document” means the dedicated value-added tax invoice, customs import value-added tax payment receipt, agricultural product purchase invoice, agricultural product sales invoice and freight settlement document.

Article 20: If value-added tax is payable on a mixed sale as specified in Article 5 hereof, the input tax amount on goods purchased in connection with the services not subject to value-added tax involved in the mixed sale may be deducted from the output tax amount if it complies with Article 8 of the Regulations.

Article 21: For the purposes of Item (1) of Article 10 of the Regulations, the term “purchases of goods” does not include fixed assets used for both items subject to value-added tax (excluding items exempt from value-added tax) and items not subject to value-added tax, items exempt from value-added tax (Exempt Items), collective welfare or personal consumption.

For the purposes of the preceding paragraph, the term “fixed assets” means machines, machinery, means of transport and other production- and business-related equipment, tools, apparatus, etc. with a life exceeding 12 months.

Article 22: For the purposes of Item (1) of Article 10 of the Regulations, the term “personal consumption” includes a taxpayer's business entertainment expenses.

Article 23: For the purposes of Item (1) of Article 10 of the Regulations and these Rules, the term “items not subject to value-added tax” means the provision of services not subject to value-added tax, assignment of intangible assets, and sale of immovable property and immovable property projects under construction.

For the purposes of the preceding paragraph, the term “immovable property” means property that is not movable, or, if moved, would cause a change in its nature or form, and includes buildings, structures and other attachments to land.

The new construction, alteration, expansion, renovation and decoration of immovable property by a taxpayer all constitute immovable property projects under construction.

Article 24: For the purposes of item (2) of Article 10 of the Regulations, the term “extraordinary losses” means losses due to theft, loss and mildew-induced spoilage caused by mismanagement.

Article 25: The input tax amount on motorcycles, motor vehicles and yachts subject to consumption tax and used by taxpayers themselves may not be deducted from the output tax amount.

Article 26: If a General Taxpayer engages in Exempt Items or services not subject to value-added tax as a sideline business and the input tax amount that may not be deducted from the output tax amount is impossible to itemise separately, the input tax amount that may not be deducted shall be calculated using the following formula:

input tax amount that may not be deducted = entire amount of input tax for the month that cannot be itemized separately × total of sales turnover of Exempt Items and business turnover in services not subject to value-added tax for the month ÷ total of all sales turnover and business turnover for the month.

Article 27: If a circumstance as specified in Article 10 of the Regulations (with the exception of Exempt Items and services not subject to value-added tax) occurs in respect of purchased goods or Taxable Services for which deduction of the input tax amount from the output tax amount has been carried out, the input tax amount on such purchased goods or Taxable Services shall be deducted from the input tax amount for that period. If such input tax amount is impossible to determine, the deductible input tax amount shall be calculated based on the actual cost for that period.

Article 28: The criteria for “small taxpayers” as mentioned in Article 11 of the Regulations are set forth below:

(1) taxpayers that engage in the production of goods or the provision of Taxable Services as well as taxpayers that engage in the production of goods or the provision of Taxable Services as their core business and engage in the wholesale or retail sale of goods as a sideline business and whose annual sales turnover subject to value-added tax (Taxable Sales Turnover) is less than or equal to Rmb500,000; and

(2) taxpayers other than those mentioned in Item (1) of the first paragraph of this Article whose annual Taxable Sales Turnover is less than or equal to Rmb800,000.

For the purposes of the first paragraph of this Article, the phrase “engage in the production of goods or the provision of Taxable Services as their core business” means that the taxpayer's annual sales turnover from the production of goods or provision of Taxable Services accounts for at least 50% of its annual Taxable Sales Turnover.

Article 29: “Other individuals” whose annual Taxable Sales Turnover exceeds the criterion for a small taxpayer shall pay tax as small taxpayers. A non-enterprise type work unit or enterprise that does not regularly carry out taxable acts may opt to pay tax as a small taxpayer.

Article 30: The sales turnover of a small taxpayer shall not include its tax payable.

If a small taxpayer, in selling goods or Taxable Services, uses the pricing method whereby the sales turnover and tax payable are combined, its sales turnover shall be calculated using the following formula:

sales turnover = tax inclusive sales turnover ÷ (1 + levy rate).

Article 31: The sales turnover that a small taxpayer is required to refund to a buyer due to a return of, or rebate on, goods sold shall be deducted from the sales turnover of the period during which the return of, or rebate on, the goods sold occurred.

Article 32: For the purposes of Article 13 of the Regulations and these Rules, the term “sound accounting” means that the taxpayer is able to keep accounting books in accordance with the state's uniform accounting system and do its accounting on the basis of lawful and valid vouchers.

Article 33: Unless otherwise provided by the State Administration of Taxation, once a taxpayer has been determined as being a General Taxpayer, it may not become a small taxpayer.

Article 34: In either of the following circumstances, the tax payable shall be calculated based on the sales turnover and value-added tax rate, and the input tax amount may not be deducted from the output tax amount nor may dedicated value-added tax invoices be used:

(1) a General Taxpayer does not practise sound accounting or fails to provide accurate tax information; or

(2) except as specified in Article 29 hereof, the taxpayer's sales turnover exceeds the criterion for a small taxpayer, but the taxpayer fails to carry out the procedures for recognition as a General Taxpayer.

Article 35: The scope of certain of the tax exempt items specified in Article 15 of the Regulations shall be as follows:

(1) for the purposes of Item (1) of the first paragraph, the term “agriculture” shall mean crop cultivation, breeding, forestry, animal husbandry and aquaculture;

agricultural producers include work units and individuals that engage in agricultural production; and

the term “agricultural produce” means primary agricultural produce; the specific scope thereof shall be determined by the Ministry of Finance and the State Administration of Taxation;

(2) for the purposes of Item (3) of the first paragraph, the term “antique books and used books” means antique books and used books purchased from the public; and

(3) for the purposes of Item (7) of the first paragraph, the term “used articles” means articles that have been used by “other individuals”.

Article 36: If tax exemption provisions apply to goods or Taxable Services sold by a taxpayer, the taxpayer may waive such tax exempt status and pay value-added tax in accordance with provisions. After a waiver of such tax exempt status, no further application for tax exemption may be made for 36 months.

Article 37: The threshold for the levy of value-added tax shall apply solely to individuals.

The ranges for the threshold for the levy of value-added tax are set forth below:

(1) for the sale of goods, a monthly sales turnover of Rmb2,000 to Rmb5,000;

(2) for the sale of Taxable Services, a monthly sales turnover of Rmb1,500 to Rmb3,000; and

(3) if tax is paid per transaction, a sales turnover per transaction (day) of Rmb150 to Rmb200.

For the purposes of the preceding paragraph, the term “sales turnover” means the sales turnover of a small taxpayer as stipulated in the first paragraph of Article 30 hereof.

The finance departments (bureaux) and offices of the State Administration of Taxation of the provinces, autonomous regions and municipalities directly under the central government shall determine the thresholds applicable in their jurisdictions within the prescribed ranges based on actual circumstances and shall report the same to the Ministry of Finance and the State Administration of Taxation for the record.

Article 38: The “date the sales amount is received in full or the voucher with which the sales amount can be demanded is obtained” specified in Item (1) of the first paragraph of Article 19 of the Regulations shall, depending on the method of sales settlement, specifically be as follows:

(1) if goods are sold by the direct payment method, the date on which the sales amount is received or on which the voucher with which the sales amount can be demanded is obtained, regardless of whether the goods have been shipped;

(2) if goods are sold and a collection and payment agency or a bank is appointed to receive the moneys, the date on which the goods are shipped and the collection procedures are carried out;

(3) if goods are sold on credit or paid for in instalments, the payment date specified in the written contract, or, if there is no written contract or the written contract is silent on the payment date, the date on which the goods are shipped;

(4) if goods are sold by advance payment, the date on which the goods are shipped; however, with respect to the production and sale of goods such as large-scale machinery or equipment, vessels and aircraft the production period of which exceeds 12 months, the date on which the advance payment is received or the payment date specified in the written contract;

(5) if another taxpayer is engaged to sell the goods, the date on which the sales list of the agent is received or the date on which part or all of the moneys are received; if a sales list and the moneys are not received, the day after 180 full days have elapsed since the shipment of the goods to be sold;

(6) if Taxable Services are sold, the date on which the services are provided and the sales amount is received in full or the voucher with which the sales amount can be demanded is obtained; or

(7) in the event that a sale of goods as specified in Items (3) to (8) of Article 4 hereof is deemed to have occurred, the date on which the goods were transferred.

Article 39: The provision of Article 23 of the Regulations concerning a quarter being the term for payment of tax shall apply solely to small taxpayers. The specific term for payment of tax by a small taxpayer shall be assessed and determined by the tax authority in charge depending on the amount of tax payable.

Article 40: These Rules shall be effective as of January 1 2009.