Nov. 2013 - Detailed implementation rules for filing of exemption on VAT-able cross-border services in Shanghai

The Shanghai Municipal Tax Bureau issued the Circular Announcement [2013] No.3 (announcement concerning the issues related to the filing of VAT exemption and clearance of VAT paid during the previous pilot period for VAT-able cross-border services) (“Announcement No. 3”) on 29 October 2013. It prescribes guidelines for the application of VAT exemption treatment with regard to VAT-able cross-border services in Shanghai.

Highlights of Announcement No. 3

Based on the scope of cross-border services that are eligible for VAT exemption listed by SAT Announcement [2013] No. 52 (“Announcement No. 52”), Announcement No. 3 provides both detailed requirements and procedures for the application of VAT exemption as well as solutions to clear the VAT paid during the previous pilot period.

1. The guidelines for filing VAT exemption

If companies are in one of the following two situations, they are eligible to apply for VAT exemption:

Services rendered outside China (“Overseas services”)
Services rendered to overseas services recipients (“Services for overseas recipients”)

	Overseas services	Services for overseas recipients
Services scope eligible for VAT exemption	(1) Engineering survey and exploration services (2) Conference and exhibition services (3) Warehousing services (4) Tangible movable property leasing services (5) Distribution and broadcasting services (6) International transportation services (7) HK, Macau and Taiwan transportation services (8) Services applicable to simple VAT taxing method a. International transportation services b. HK, Macau, Taiwan transportation services	(8) c. R&D services applicable to simple method (9) Cross-border services provided to overseas entities a. R&D services, IT services, cultural and creative services, logistics and ancillary services, certification and consulting services, radio, film and TV services, etc. b. advertising services
Qualifications	Criteria: a+b a. Signing cross-border service contract b. Income derived after implementation date	Criteria: a+b+c+d c. Services provided for overseas entities d. Income derived from overseas
Required documents	(1)~(5) services: i + ii + iii i. Filing form for VAT exemption ii. Cross-border service contract iii. Overseas performance supporting materials (6),(7),(8.a/b) services: i + ii + iii + iv + v iv. Bill of lading v. Entry-exit visa evidence	(8.c) and (9) services: i + ii + vi + vii vi. Services provided to overseas entities vii. Incomes are derived from overseas
Start date	Filing for tax exemption ahead of VAT declaration since November 2013
Time limit	Tax authority must reply within 14 working days of application

2. The clearance for VAT paid during the previous pilot period

Period covered	1 January 2012 to 31 October 2013
Schedule	Submission must be done before 31 December 2013 Clearance of the VAT paid must be completed before 28 January 2014
Post-filing	File all the contracts signed before 31 October 2013 at once and separately prepare filing materials for each contract
Documents	Detailed clearing form for VAT exemption Calculation explanation and accounting voucher for transferring out the input VAT Written explanation for the differences
Requirements	Separate taxable income and exempted income Special VAT invoice for exempted income should not be issued
Non-creditable input VAT	Non-creditable input VAT = (income subject to simple VAT taxing method + non VAT taxable income + VAT exempted income) / (sales + turnover)

Observations for Announcement No. 3

1. Departure from Announcement No. 52

There is a difference between Announcement No. 52 and Announcement No. 3 with regard to the application materials for filing tax exemption. Specifically, according to the Announcement No. 52, it is stipulated that the provision of services from (1) ~ (5) and item (9.b) should provide evidences that services are performed overseas. However, pursuant to Announcement No. 3, all the services under item (9) are merely requested to provide supporting materials that the places of services recipients are outside China and incomes derived from overseas. This departure may cause confusion for taxpayers.

2. Compliance burden

It may be difficult for some taxpayers to collect all the cross-border service contracts, especially for those services provided between related parties. In this regard, taxpayers will face the dilemma of resigning contracts risks and losing the opportunity of enjoying VAT exemption.

As it is required by the Announcement, in some circumstances, supporting material must be issued by competent authorities, notary institutions, or law firms (e.g. the registration certificate for technology export contract and qualification certificate, or the confirmation sheet for offshore outsourcing services contracts, etc.) which are both time consuming and costly. Even though it is possible to obtain those certificates, it is often quite difficult and usually takes a long time.

3. Limited time for taking action

The Shanghai tax authority only provides two months for taxpayers to apply for 22 months VAT exemption and tax clearing for VAT paid during 1 January 2012 and 31 October 2013. Considering the heavy preparation workload, the time window is relatively short. It is almost impossible for taxpayers to collect all the required application materials within two months, which means that they may lose their final chance to apply for the VAT exemption.

4. Need for further clarification

For those services requiring income derived from overseas, if taxpayers did not receive the service fees yet but already issued formal invoices, the VAT tax obligations already occurred. How can taxpayers claim for VAT exemption without evidences that the income is derived from overseas?

Want to know more?

Peter Law Partner, Tax Advisory Services Shanghai

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Anthony Tam Senior Advisor, Tax Advisory Services Hong Kong

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