Shanghai VAT Reform Pilot Scheme: Clarification of zero rate/exemption for servicesprovided to overseas entities

On 29 December 2011, China’s Ministry of Finance and the State Administration of Taxation jointly issued the Notice Concerning the Application of Zero-rate and Tax-free policy for Value-added Tax on Taxable Services in Shanghai (“the Notice?, which took effect on 1 January 2012. The Notice clarifies the scope of taxable services eligible for the zero rate or exemption under the VAT reform pilot scheme in Shanghai.

The main points of the Notice are summarised below.

1. Tax Treatments of Taxable Services

Based on the general principles applicable to services provided to overseas recipients under Circular 110 and VAT taxable services under Circular 111, Circular 131 lists the scope of services that are eligible for zero rate or exemption when provided by a pilot taxpayer in Shanghai:

(1) Zero-rated Services

(i) International transportation services relating to the transport of cargo and passengers (a) from China to overseas, (b) from overseas to China and (c) outside China.

(ii) R&D services provided to overseas entities; and

(iii) Design services provided to overseas entities (excluding design services relating to immovable property in China).

(2) Exempted Servcies

(i) Geotechnical investigation, surveying and exploration services for projects and mineral resources located outside China;
(ii) Conference and exhibition services, provided the conference and exhibition places are located outside China;

(iii) Warehousing services, provided the storage sites are located outside China;

(iv) The leasing of tangible and moveable goods provided the leased project is used outside China;

(v) International transportation services listed above but not supported by an international transportation operation licence;

(vi) Other services provided to overseas entities, including:

• Technology transfers, technology consulting, energy performance contracting services (except services relating to a contract object located in China), software-related services, circuit design and testing services, information systems services, business process management services, the transfer of trademarks and copyrights, intellectual property services, and logistics and ancillary services (excluding warehousing services);

• Certification, attestation and consulting services (except services relating to goods/immovable property located in China); and

• Advertising services for ads published outside China.

2. Qualification criteria for "international transportation services"

Only Pilot Enterprises and Individuals that have obtained the required qualifications and operation licenses are eligible for this preferential treatment stated in Section 1(1).

3. Detailed preferential treatment

Qualified Pilot Enterprises and Individuals shall be subject to the "Exempt, Credit and Refund" method if they are General VAT Payers and the refund rate is the same as the applicable VAT rate. However, if they are Small-scale VAT Payers, they shall not be eligible for zero rated but would be exempted from VAT on the export of such services.

4. Compliance requirements

Qualified Pilot Enterprises and Individuals will be required to perform the VAT "Exempt, Credit and Refund" or Exemption filing with the in-charge tax authorities on a monthly basis. The MOF and SAT will issue a separate notice to elaborate the relevant implementation details.

Should you have any questions regarding the content of this circulation of the Notice itself in particular or the VAT reform pilot scheme in general, or if you would like to engage Kaizen to handle the registration and filing of VAT, please feel free to contact our professional consultants.

Enclosures