Transportation and certain modern services industries have gradually been placed under the scope of value-added tax ("VAT") in a switch from business tax since January 1, 2012. For cross border transactions of such industries, the State Administration of Taxation ("SAT") promulgated the Announcement  No. 52 ("Announcement 52") on September 13, 2013 to specifically regulate the VAT exemption.
Subsequently, the State Council approved the expansion of the VAT reform to rail road transportation, postal services and telecommunication industries. Meanwhile, the implementation of Announcement 52 appeared to generate some comments for improvement. To reflect such expansion and comments, the SAT recently released the Announcement  No. 49 ("Announcement 49") in a bid to revise and replace Announcement 52. Announcement 49 takes effect on October 1, 2014. The key points of Announcement 49 are as follows.
Expansion of Exempt Cross-Border Services
Announcement 49 expands the VAT exemption to the following cross-border services:
- Postal services provided for exported goods, including: (1) sending letters, parcels and other mails abroad; (2) issuing stamps abroad; (3) exporting stamp albums or other postal items; and (4) agency business such as express delivery and logistics with the venues of recipients located overseas;
- Collection and delivery services provided for exported goods, such as collection, sorting and delivery services for outbound letters and parcels; and
- Telecommunication services provided to overseas customers, such as international voice, text message and multimedia services.
To enjoy the VAT exemption, taxpayers must enter into written contracts with foreign counterparties regarding cross-border services. Announcement 49 considers certain documentation as written contracts in this context. First, for flight management services provided to overseas air transport enterprises, flight schedules issued by the Civil Aviation Administration of China ("CAAC") could be deemed a written contract. Second, for logistics ancillary services provided to overseas air transport enterprises, a contract entered into between the service provider and the representative offices of such overseas air transport enterprises in China could be deemed a written contract for the VAT exemption purposes. Third, for temporary flights entering China, records by the CAAC Settlement Center could be deemed a qualified written contract.
Deemed Overseas Income
The VAT exemption only applies to income obtained from overseas. Announcement 49 permits the following domestic income to qualify as deemed overseas income.
- For logistics ancillary services provided to overseas air transport enterprises, incomes obtained from the CAAC Settlement Center, the China Aviation Settlement Co., Ltd. and the representative offices of such overseas air transport enterprises in China;
- For services provided to related overseas entities, incomes obtained from domestic third party settlement companies, such as financial companies, capital pools, and capital settlement centers established to function as a centralized capital operation and management unit for internal members of multinational group companies;
- Other income as mandated by the SAT.
Services Provided to Hong Kong, Macao and Taiwan
It is expressly stated in Announcement 49 that services provided to Hong Kong, Macao and Taiwan will be deemed services provided to overseas so to enjoy the VAT exemption, unless otherwise provided.
It is expected that the scope of Announcement 49 will be further expanded along the line of the VAT reform progress. For the time being, however, the focus of the VAT exemption is on cross-border postal and telecommunication services. We will closely monitor the future development in this area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.