The long-awaited authoritative clarification on VAT treatment of reinsurance in China has been announced.
On 18 June 2016, the Ministry of Finance (MOF) and the State Administration of Taxation jointly issued Circular Caishui  68 (Circular 68) which provides a supplementary explanation on the reinsurance arrangement under the VAT Regime. The Circular has a retrospective effect, backdated to 1 May 2016.
Circular 68: two scenarios of VAT treatment on reinsurance
Firstly, VAT is exempt when an insurance company which is established within mainland China provides reinsurance services to another insurance company established outside of mainland China, and the service is completely consumed outside of mainland China. Secondly, VAT registers which provide reinsurance services within mainland China shall follow the VAT rules that are imposed on the underlying insurance policies. Where a reinsurance contract covers several different insurance contracts and all the underlying insurance contracts are VAT-exempt contracts, the reinsurance contract is immediately VAT-exempt. Otherwise, the reinsurance contract is subject to VAT.
The first scenario proves an alignment with the Circular 38 that sets out the rules of VAT, where cross-border transactions apply the rules of zero VAT or VAT exemption. For example, insurances covering risks arising out of export transactions including export goods insurance and export credit insurance are VAT-exempt. In the first scenario reinsurance is exported and it is therefore exempted from VAT. The second scenario gives a very specific case of VAT treatment on in-country reinsurance. When the underlying insurance contract is subject to VAT so is the reinsurance contract; it means when an underlying insurance contract is VAT-exempt, the reinsurance contract follows suit. Currently the following insurances are VAT-exempt:
- agriculture and livestock insurance
- term life insurance that exceeds a period of one year
- term health insurance that exceeds a period of one year
- term pension annuity insurance that exceeds a period of one year
- insurance covering export risks
- export credit insurance
Scenarios that are not specified in Circular 68
VAT treatment on reinsurance where the premium is ceded from mainland China abroad, is not specified in Circular 68. Nevertheless, for a long time there has been a withholding rule under the business tax regime applying on the out-going premium. The rule is not changed despite the introduction of VAT which is outlined in a general term in Circular 38; that overseas reinsurance companies are subject to the VAT at a withholding basis, where the China-based reinsured should deduct the VAT from the ceding premium abroad. This VAT amount can be considered as input tax credit to be set-off the output tax after the withholding process is completed and a certificate is obtained.
It is not clear what VAT treatment should apply where an in-country reinsurance policy which covers both taxable insurance policies and VAT-exempt insurance policies. But, given the current practices we observe, this scenario of combination happens very rarely.
How can IPT Quote help?
IPT Quote, TMF Group's online tax calculation tool, will display the withholding rate for cross-border reinsurance where the premium is ceded from China abroad. Two subclasses will need to be configured for the in-country reinsurance line where the different treatment between the taxable insurance premium and VAT-exempt premium will be manifested.
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.