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VAT pilot project launched in Shanghai

Since 1 January 2012 a pilot project has been running in Shanghai which aims at integrating income from certain service industries which was previously subject to a form of corporation tax (“Business Tax”, “BT”) into the VAT system.

Prior to the introduction of the pilot system most companies paid no VAT for services which were rendered in Shanghai. Instead their revenues were subject to Business Tax which currently ranges in Shanghai from 3 % to 5 %. Only the delivery of goods was subject to VAT ranging from 13 % to 17 %. As the businesses enjoy the right to deduct tax, the VAT on transactions between companies is a purely transitory item.

According to the implementing rules (Circular 110 and 111) of the Chinese Ministry of Finance (MOF) and the Chinese State Administration of Taxation (SAT), the pilot project in Shanghai includes the transport sector as well as certain “modern” service industries such as the leasing of physical goods (including operating and finance leasing), research and development, information technology, creative and cultural services (copyright and trademarks law, IP, advertising, conference and event services), certification and advisory services (including accounting and legal advice). Depending on the particular industry, the VAT will amount from 3 % to 17 %.

Pursuant to Circular 111 not only Chinese businesses in Shanghai which provide taxable services will have to pay VAT but also foreign businesses who provide taxable services to natural and legal persons in Shanghai. If a foreign supplier does not have a branch office in Shanghai, then the beneficiary in Shanghai pays the VAT.

However, where foreign businesses provide value-added tax services to Chinese businesses which are consumed exclusively outside of China, VAT is not applicable to these services.

The pilot programme represents a first step towards reforming indirect taxation in China so that it is in line with the current international practice and similarly makes goods and services subject to VAT.

Contact Person

Raymond Kok, Shanghai