Value Added Tax (VAT) in China is notoriously complex. It’s one of the most comprehensive taxes among 170 countries that have implemented VAT (or equivalent tax). The difference between Chinese accounting standards and the West is that China adopts a multiple VAT rate system where the rate depends on the industry.
Whether you are entering China or already operating here, this blog post will guide you to better understand the China VAT system in 2023.
How is China VAT Tax Paid?
As in many countries, VAT in China is added at each step throughout a supply chain through which a product or service progresses towards its end users. Each time the value of a product is enhanced and added, more VAT is applied and must be paid.
What Are the Current China VAT Rates?
Since 1 April 2019, the standard rate of VAT is 13% for all VAT taxpayers. However, the applicable VAT rate for general VAT payers depends on the industry. Breakdown of applicable VAT rates per industry can be found in the table below.
|Industries||Applicable VAT Rate|
|Sales and importation of goods||13%|
|Provision of repairs, replacement, and processing services||13%|
|Tangible movable property leasing services||13%|
|Sales or importation of necessity goods (e.g. agricultural products, water, gas)||9%|
|Transportation services, postal services, basic telecommunications services, construction services, immovable property leasing services, sales of immovable properties, transfer of land-use right||9%|
|Value-added telecommunications services, financial services, modern services (except for leasing services), consumer services, sales of intangible properties (except for land-use right)||6%|
Information is from PricewaterhouseCoopers 2023 Tax Summary
China has also extended preferential VAT policy for small-scale taxpayers from 1 March 2023 to 31 December 2023. The reduced VAT rates are intended to provide tax relief to small size businesses in China due to COVID-19. Small scale taxpayers may be subject to a deducted VAT rate of 1% instead of 3%.
China VAT & Rebates: What You Need to Know
Tax rebates most commonly focus on exports. Until recently, China has derived a great deal of its industry and income from foreign companies who manufacture products to be sold overseas. However, foreign companies which manufacture for export in China often don't even know that they're eligible to gain a refund on their products!
Furthermore, when working with Chinese exporters to get your products abroad (as many foreign companies do rather than setting up their exporting operations in China), the local companies will often not disclose that they receive a VAT rebate. This is so that they can charge the total cost and pocket the rebate themselves.
Commonly, the exporting company may apply for a VAT rebate once the products have been exported. They can supply their customs declaration, export invoice, export of foreign exchange check-offs list and other official information related to the export. Whether you are exporting directly through China or you're working with a local export company to handle this for you, you need to know the impact of the possible VAT rebate on your bottom line.
Is my Wholly Foreign-Owned Enterprise (WFOE) in China eligible for VAT exemptions?
The short answer is yes - VAT can be deductible for WFOE companies. However, you have to meet several criteria to be eligible for VAT exemption. We have listed the 2 main criteria below:
1. WFOEs must be registered as general taxpayers
China's tax system has two types of VAT status: small-scale taxpayers and general taxpayers. Small taxpayers are companies in China with annual revenue below 5,000,000 RMB. These companies are subject to a 3% VAT. However, VAT is not deductible if you are a small-scale taxpayer and will become a direct cost to your business.
Once the company has registered as general VAT taxpayer status, VAT can be deducted, which can benefit tax control.
2. Only special VAT fapiao can be used for VAT deduction
There are two significant categories of invioces (fapiao) – general fapiao and special value-added tax (VAT) fapiao. Only special VAT fapiao can be used for tax deduction purposes, while general VAT fapiao is only used to provide evidence of a payment or transaction.
For more information about the different types of fapiaos, visit What Your WFOE Needs to Know About China’s ‘fapiao’ Invoice System.
Case Study of VAT Deduction in Food Operation Industry
You are the owner of a food operation company, and the company is registered as a general taxpayer. Meanwhile you are providing high-quality catering services, you can also enjoy VAT deduction. Consider that your company meets the criteria of enjoying a 10% deductible rate while the current deductible input tax is RMB 10000 yuan, leading to a deductible tax amount of RMB 1000 yuan (10000 x 10%). In this case, you can declare the tax deduction in 3 different situations depending on the output tax amounts:
Case 1: payable tax amount = 0;
For example, the output as well as the input tax amount is both 10000, so that the payable tax amount is 0. In this case, all of your deductible tax amount will be remained and carries forward to the next phase of deduction period.
Case 2: payable tax amount > deductible tax amount;
For example, the output tax amount is 14000 and input tax amount is 10000, so a tax of 4000 shall be paid. In this case, by using your deductible tax amount of 1000, you will only need to pay 3000 of tax (4000 – 1000 = 3000).
Case 3: payable tax amount < deductible tax amount;
For example, when the output tax amount is 10400 and the input tax amount is 10000, a payable tax amount of 400 will be applied, which is less than the deductible tax amount. In this case, the payable tax amount will be deducted from deductible tax amount in current phase, while the remaining amount (1000 – 400 = 600) will be carried forward to the next phase.
To enjoy deductible tax amount, you need to meet the following criteria:
- General taxpayers in the life service industry;
- Taxpayer whose sales amount from providing life services accounts for more than 50% of the total sales amount.
Deducible VAT amount: up to RMB 300000 yuan per quarter.
Implementation period of preferential tax policies: from 1st Jan. 2023 to 31st Dec. 2023
Many foreign companies don't know how to apply for their tax rebates or if they're eligible at all, and whether their products are eligible for a full refund or only partial (as both exist). Where do you go for decent advice that you can rely on?
Well, you need to have a trusted accountant either on your team or at least to offer advice. If you're working with an export agency to get your products overseas, you need to have a transparent relationship with them to be assured that they're not undermining you. Hongda provides Chinese accounting services to handle your daily and monthly Chinese accounting, apply for tax rebates and handle VAT on your behalf.
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