On 24 March 2016, the PRC Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly released the Notice on the Comprehensive Roll-out of the Business Tax (“BT”) to Value Added Tax (“VAT”) Transformation Pilot Programme (Circular Caishui [2016] Number 36) (“Circular”). Pursuant to which, the reform of replacing BT with VAT will be extended to the construction, real estate, financial services and lifestyle services sectors commencing from 1 May 2016. The VAT reform has significant impact for such businesses and consumers in PRC and together with the landmark tax reform, is expected to reduce tax burden on all industries and promote the economy.
The 92-page Circular comprises a general notice together with 4 appendices including (i) the Implementation Measures of the BT to VAT Pilot Programme (Appendix 1); (ii) Regulations on Certain issues in relation to the BT to VAT reform (Appendix 2); (iii) Regulations on the transitional policy in relation to the BT to VAT (Appendix 3); and (iv) Cross border taxable activities which will be eligible for zero VAT or VAT exemption (Appendix 4). We will highlight a few salient features of the reform below.
VAT Rates
Article 1 of the Implementation Measures of the BT to VAT Pilot Programme (“Implementation Measures”) stipulates that the VAT taxable scope covers “sales of services, intangibles or immovable properties within China”. In terms of the applicable VAT rate, Article 15 of the Implementation Measures provides that the rate for transportation services, postal services, basic telecommunication services, construction services, immovable property leasing services, sales of immovable properties and transfer of land use right is 11%; the rate for leasing services of tangible movable properties is 17%; and the rate for other activities within the taxable scope (including financial services and consumer services, etc.) is 6%. For certain cross-border taxable activities subject to the specific scope to be stipulated by the MOF and SAT, the tax rate is 0. For more details on the sales of services, intangibles or immovable properties, they are contained in the Implementation Measures.
Exceptions
Appendix 2 of the Circular provides that the following items are not subject to VAT :-
1. Interest arising from money deposit;
2. Insurance compensation payable to the beneficiary;
3. Residential special repair funds paid to the housing authorities, housing fund management centres; real estate developers or property management companies; and
4. Transfer of buildings and land use rights as part of the asset re-organization (by way of mergers, division, sale or exchange).
Transitional Arrangement
Appendix 3 of the Circular provides certain transitional preference policies by way of exemption; refund or a reduced rate of VAT. Amongst the various tax exemption items, international investors would be most interested in the following :-
1. sale and purchase of securities by PRC companies entrusted by QFII;
2. sale and purchase of A shares listed in the Shanghai Stock Exchange by Hong Kong market investors (including company and individual) through the Shanghai-Hong Kong Stock Connect;
3. sale and purchase of the mainland funds though the mutual recognition of funds schemes by Hong Kong market investors; and
4. the sale and purchase of stocks and bonds by the operator of the investment funds of securities (including closed and open security investment funds).
VAT for Sale and Purchase of Residential Properties
The VAT chargeable for the sale and purchase of residential properties would also be a concern to investors interested in PRC real estate. For the sale of residential properties in Beijing, Shanghai, Guangzhou and Shenzhen by individual residents, a VAT of 5% of the full sale price is chargeable if the property is sold within 2 years of the purchase. For sale of non-ordinary residential properties after 2 years or more of the purchase, a VAT of 5% is chargeable on the difference between the sale price and the purchase price. For the sale of ordinary residential property after 2 years or more of the purchase, VAT will be exempted. For properties located in other cities, a similar mechanism is adopted except for the VAT exemption being applicable to all residential properties sold by individuals after 2 years or more of the purchase (without distinguishing ordinary and non-ordinary residential properties).
It is expected that the MOF and/or SAT may issue further transitional rules for specific industries and domestic companies in response to the priority policy of the PRC government. Businessmen with China operations are advised to keep themselves updated of the latest development.
Due to the extensive details of the Circular, the above is not an exhaustive summary of the VAT reform. If you have any questions regarding the above reform or other tax issues in PRC, experienced lawyers in our China Business department would be happy to assist you.