China Tax Update 2009 - AHK Greater...

©2009 Deloitte Touche Tohmatsu CPA Ltd. All rights reserved.

Tax update in VAT, Business Tax and Customs

German Chamber of Commerce in China, TianjinNovember 12, 2009

Sarah ChinManuela Blochwitz

©2009 Deloitte LLP. All rights reserved.

Agenda

• Introduction

• Tax update in VAT, Business Tax and Customs

Ø Preferential indirect tax treatment on R&D centers

Ø Export VAT refund

Ø Clarification of Business Tax rules

Ø Updates on Customs regulations and practices

• Special zones and policies in Tianjin

• Q&A

2

©2009 Deloitte LLP. All rights reserved.3

China and the global downturn

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Import

Export

USD100 Million


Germany China

VAT registration possible with no PE VAT registration requires a PE in China

VAT invoicing must be compliant with the German VAT rules

VAT invoices via the Golden Tax machines – Fa Piao

Standard VAT rate 19% Standard VAT rate 17%

No restriction on input VAT recovery on exports

Export VAT Refund and export duties –pricing issue

Place of supply rules (goods and services)

Place of supply rules ?

VAT repayment traders VAT credit system

VAT audits by the VAT Authority are very common

VAT audits by the SAT are limited

4

Key differences between Germany and China


Practical difficulties we have seen in the past

• Export VAT Refund

• Business Tax for services rendered abroad

• Processing trade relief

• Different local policies

• Approach from the Customs Authority

• Transparency and visibility

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R&D center- preferential VAT treatment announced

Tax Policies for the Purchase of Equipment by R&D Center (Caishui [2009] No. 115, effective from 01/07/2009 to 31/12/2010)

• Aims to restore the balance caused when the import VAT exemption was

removed for encouraged projects

• Foreign invested R&D centers which import “qualified equipment” or goods for

scientific technology development purpose are exempt from the Customs duty

and import VAT

• R&D centers are granted a full recovery of the input VAT incurred for the

purchase of domestically manufactured “qualified equipment”

• Qualified equipment refers to experimental equipment, setting/device and

instrument which are required in the scientific research, teaching and

technology development as listed in the attachment of this Notice

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Export VAT Refund – several changes

• Export VAT Refund is somewhat unique in China

• To give a boost from the recent decline in exports, the Chinese Government

increased the Export VAT Refund rates several times in the past and also

during this year

• Caution

ü companies are struggling to implement the refund which has either been refused by

the Authority or simply written off at the year end

ü Export VAT refund connected to Customs logbooks

ü Export VAT refunds revoked on certain goods leads to a domestic supply

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Jun 1 2009Jun 1 2009Jun 1 2009

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Apr 1 2009Apr 1 2009Apr 1 2009

Jan 1 2009Jan 1 2009Jan 1 2009

Dec 1 2008Dec 1 2008Dec 1 2008

Nov 1 2008Nov 1 2008Nov 1 2008

Feb 1 2009Feb 1 2009Feb 1 2009

Aug 1 2008Aug 1 2008

Certain Textiles and clothing(Increased to 13%)

Certain labor–intensive products, such as rubber products (from 5% to 9%),Bags and shoes (from 11% to 13%)Certain labor–intensive products and hi-tech, high value-added products(Increased to 9% - 14% range)

Certain mechanical and electrical products(Mechanical: increased to 17%, Electrical products: increased to 14%)

Certain textiles and clothing(Increased to 15%)

Certain Electric, Clothing, Chemical products(Electric: increased

to17%, Clothing: increased to16%)

Certain agricultural goods, electromechanical products, glass and

shoes and hats, etc. (Increased to 13%-15% range)

Seven increase in the export VAT refund rates since August 2008

Export VAT Refund – changes at a glance


The clarification of Business Tax rules

Business Tax Exemption Policies (Caishui [2009] No. 111 and 112, effective from 01/01/2009)

• Provides clarification regarding the Business Tax treatment of cross-border

services

• For services (all types of services) rendered under cross-year contracts when

the service is provided overseas while the service recipient is located in China,

no Business Tax is due before December 31, 2009 if contract is signed before

January 1, 2009

• Limited services which are provided by overseas entities or individuals rendered

outside China but supplied to recipients in China, are not subject to Business

Tax. This will be retrospective effective from January 1, 2009

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Supplementary Customs Declaration

Supplementary Customs Declaration on Customs Valuation, Tariff Classification and Certificate of Origin (Circular of GAC [2009] No. 49, effective from 01/10/2009)

• As from October 1, 2009, the supplementary declaration will allow the Customs

authority to request further information from the importer/ exporter without

opening an official Customs inquiry

• Needs to be submitted within 5 working days after the exporter/ importer have

received the written request from Customs. If the importer/exporter fails to timely

file the supplementary declaration, Customs can determine the dutiable price,

tariff classification and origin based on the information available

• A self declaration by the importer/exporter to provide the Customs authority with

additional information at the time of import/export is also possible

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E - export clearance, a pilot program

Bulletin on Pilot Reform of Classified Export Clearance (Bulletin [2009] No. 33 of the General Administration of Customs, effective from June 17, 2009)

• The pilot program will be limited to 15 cities of China including Shanghai, Beijing,

Tianjin, Dalian, Xiamen, Guangzhou and Shenzhen.

• General Administration of Customs will select who can take part in this pilot by

examining 2 main criteria;

Ø whether the exporting company has a good tax compliance record (this is likely to take

into consideration the Customs compliance rating and those with a rating of A will

clearly be favored); and

Ø whether the goods can be considered to be at a "low risk". Whilst there is no definition

of low risk, Customs will typically consider low risk goods to include those with a low

rate of export VAT refund and goods which do not carry a high export duty and

restrictions.

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Abolishment of 60% rule for import of spare parts

Circular of Abolishment of Administrative Measures for the Import of Automobile Components and Parts for the Assembly of Complete Vehicles ( Order of General Administration of Customs [2009] No.185, effective from 01/09/2009)

• The 60% rule announced in 2005 imposed higher duties when parts were

imported into China for assembly into vehicles. They were subject to Customs

duty as a finished vehicle where the total value of the imported parts and

components was over 60% of the total value of the finished vehicle

• WTO ruled in December 2008 that the 60% rules violated global trade policies,

and ask China to implement changes.

• With this circular the 60% rule is no longer applicable and this has a significant

impact on the import duty as the Customs duty on finished vehicle is 25%

compared to 10% on imported vehicle parts.

• Practical impact? 12


More relaxed policies on Processing Trade Relief

2009 Catalogue of Goods Prohibited from Processing Trade Relief (“PTR”) (Circular of Ministry of Commerce and GAC [2009] No.37, effective from 03/06/2009)

• The total number of HS codes listed in the 2009 Prohibited Catalogue is

reduced to 1,759. Exclusions including steel products, non-ferrous metal,

certain light industrial products

Reduced late interest surcharge on domestic diversion of PTR (Order of GAC [2009] No. 13, effective from 16/03/2009)

• The rate of defer tax interest for PTR goods to be sold in China will be

changed from 5.31% to 0.36%

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Approach of the Authority

• Remember the chart shown at the beginning on how China is affected by the

global downturn

• Imports are declining

• Declining imports = declining import duty

• Will there be a decline in the amount of duty collected by the Authority?

• However, the target of import duty collection by Customs is still high

• Customs supervision is enhanced in particular focusing on company self-

assessment, combined with customs audit, the national specialized examination,

and cooperative audit with other authorities, .e.g. tax authorities and foreign

exchange authorities

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• Import and export amount in China dropped to around USD 760 billion from January to May, which decreases 24.7% compared with the same period last year.

• The target of Customs tax collection increases 9.4% in 2009 compared with 2008;

• Bonded import audit, enterprises audit and anti-smuggling investigation are important means by Customs to avoid tax erosion.

Target of Customs Tax Collection in 2009


Special zones in Tianjin

Dongjiang Bonded Port (“BP”) – a combined functions and treatments of Free Trade Zone, Export Processing Zone and Bonded Logistic Park

• The special zone will be seen as a non Chinese territory for VAT and

Customs purposes (like a BLP)

Ø Goods shipped from the BP to overseas are exempt from export duty

Ø The export VAT refund for domestically sourced goods can apply for upon the

entry into the BP

• Transactions between companies within the BP are not subject to VAT

and Consumption Tax

• Goods manufactured by enterprises in the BP which are sold in the BP or

exported, are exempt from the VAT and Consumption Tax

• Import/export permits and licenses are not required for goods leaving for

or arriving from overseas into the BP

• No limitation of the storage period in the BP16


“Tailor-Made” Bonded Regulatory Measures

• Tianjin Customs have adopted a creative policy called “tailor-made” bonded

regulatory and administrative measure

• Export-oriented enterprises with either a good Customs compliance rating, with

core intellectual property and brand name and state-supported/encouraged

industries can apply for special Customs administration treatments

• Customs will review the application case by case and may grant a favored

“made-to-measure” treatment, such as e.g.;

Ø simplification procedure of the Customs handbook compliance

Ø Customs clearance first / “batch/collective reporting” later

Ø consolidated declaration of HS codes with similar headings

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BT benefits by the Financial Department Tianjin

• The local Financial Department will pay back the Business Tax declared and paid

on services rendered by newly established companies (100% for the first 2-3

year, 50% for the 4-6 year).

• Covered companies are but not limited to:

Ø Newly established large logistic companies which mainly engage in

distribution, procurement, warehousing and packaging in Tianjin Binhai New

District or in the Dongjiang Bonded Port;

Ø Financial companies;

Ø Certain service outsourcing companies (IT service outsourcing, HR service

outsourcing, etc.)

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Contacts

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Sarah Chin National Indirect Tax PartnerDeloitte Shanghai86-21-6141 [email protected]

Dirk HällmayrPartner, German Desk ChinaDeloitte Shanghai86-21-6141 [email protected]

Manuela BlochwitzManager, Indirect TaxDeloitte Shanghai86-21-6141 [email protected]

Tim Sichting Manager, AuditDeloitte Tianjin 86- 22-2320 [email protected]

Frank Tang Tax PartnerDeloitte Tianjin 86- 22-2320 [email protected]

mailto:[email protected]





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