Shanghai Implementation Rules – VAT Exemption on Cross-border Service Fee Income

I. Foreword

 The VAT-to-BT (VAT stands for Value-added Tax, while BT stands for Business Tax, which are 2 types of mutually exclusive turnover taxes in China) reform has been gradually expanded to the whole nation of China. Particularly, Shanghai, as the pilot city where the VAT-to-BT reform was enforced first, has implemented such reform for almost 2 years, since January 1, 2012. The state encourages companies registered in China to provide cross-border services, i.e. provide relevant services that are rendered outside China. In this regard, State Administration of Taxation (“SAT”) has published a circular SAT Order 2013 No.52 (hereunder referred to as “SAT Order No.52”) regarding the scope of the cross-border services that can be exempted from VAT. Based on that, Shanghai Tax Bureau has recently issued a circular (hereunder referred to as “Shanghai Order No.3”). Shanghai Order No.3 is a detailed implementation rule regarding the VAT exemption registration requirements on the cross-border service income, relevant conditions, documents to be submitted etc. for companies that are registered in Shanghai and provides cross-border services. Such circular will impose significant impact on relevant companies.
II. Key Points of Shanghai Order No.3
For relevant companies in Shanghai (including foreign investment enterprises and Chinese domestic enterprises) that provide cross-border services, they should pay special attention to the following issues in relation to the VAT exemption treatment:-
  • VAT exemption registration should be conducted for each period with the in-charge tax authorities. From the period of November 2013, if such registration is not done properly, VAT exemption treatment will not be granted. In other words, basically relevant companies should conduct such VAT exemption registration on a monthly basis.
  • For the period from January 1, 2012 to October 31, 2013, relevant companies in Shanghai that have derived cross-border service income and adopted VAT exemption treatment should conduct backlog VAT exemption registration and settlement, covering such whole period. Relevant documents for such backlog registration purpose should be submitted to the in-charge tax authorities by December 31, 2013, and the in-charge tax authorities will complete the assessment/approval process by January 28, 2014. It means that relevant companies will have the risk that their relevant cross-border service income that has already been adopted the VAT exemption treatment might be subject to retroactive adjustment by the in-charge tax authorities, and tax make up payments may be required.
  • Shanghai Order No.3 raised very strict requirements to the relevant companies in relation to the documents to be submitted to the in-charge tax authorities for the VAT exemption registration purpose. For example:-
    • Documents that can prove the relevant services were rendered outside China: For example, for organizing services provided for holding conferences or exhibitions overseas, it is required that the overseas conference/exhibition hosting institutions (landlords) should issue relevant proof documents. For exhibitions held overseas, venue leasing agreements should be signed with the relevant overseas landlords. If such documents cannot prove the relevant services were rendered outside China, then the Shanghai companies should provide the proof documents issues by governmental or notarization organizations, law firms or other third parties.
    • For certain cross-border services that can only be exempted from VAT if they are provided to overseas clients under SAT Order No.52, the Shanghai companies should submit to their in-charge tax authorities the proof documents which can verify the clients are located overseas, and the service income is derived from overseas.
  • No VAT special invoice is allowed to be issued for the cross-border services under the VAT exemption treatment. Further, the input VAT attributable to the service income that has been exempted from VAT should be “transferred out” and absorbed as cost by the relevant Shanghai companies.
  • If the relevant Shanghai companies have enjoyed the financial subsidies under the VAT-to-BT reform, and if they apply for VAT refund through the backlog registration/settlement under Shanghai Order No.3, such application will not be entertained at this stage.
III. Conclusion and Indication
In view of the above, Shanghai Order No.3 will impact relevant Shanghai companies significantly. Such companies should take immediate actions to check and prepare relevant documents required for the VAT exemption registration purpose. Otherwise, they may need to make up VAT payments or cannot enjoy the VAT exemption treatment in the future. If certain required documents cannot be obtined, then proactive communication with the in-charge tax authorities is recommended, aiming to seek the approval on providing other replacing documents. For the future, relevant companies should make efforts to obtain, file and submit relevant proof documents to the in-charge tax authorities on a timely basis. It should also be considered that, when promoting such cross-border service clients/projects, it should be mentioned to the clients about such documents requirements for VAT exemption registration purpose. Although theoretically speaking, Shanghai Order No.3 only applies to companies in Shanghai, it should be noted that Shanghai has been playing a key role in China’s VAT-to-BT reform. It is anticipated that tax authorities in other cities or provinces may very likely refer to various detailed measures under Shanghai Order No.3. Therefore, relevant companies in other cities/provinces may refer to such rule and make preparation accordingly.
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