Laws of the People's Republic of China

the Ministry of Finance, the State Administration of Taxation

Circular of the Ministry of Finance and the State Administration of Taxation on Some Policies concerning Value-added Tax

Cai Shui [2005] No. 165

The public finance departments (bureaus), bureaus of state taxes and those of local taxes of all provinces, autonomous regions, municipalities directly under the Central Government, and cities specifically designated in the state plan, the Financial Bureau of Xinjiang Production and Construction Corps,

Upon deliberation, some problems concerning the value-added tax are hereby clarified as follows:

1.

With regard to the determination of the time when the value-added tax obligation arises from the selling of self-produced goods, as well as the provision of labor services subject to value-added tax and construction labor services, the Circular of State Administration of Taxation on Some Issues Concerning the Turnover Taxes Imposed on the Taxpayers Who Sell Self-produced Goods, Provide Labor Services Subject to Value-added Tax and Simultaneously Provide Construction Labor Services (Guo Shui Fa [2002] No. 117) provides that the time when the obligation arises for a taxpayer to pay value-added tax for selling self-produced goods and providing labor services subject to value-added tax and construction labor services simultaneously shall be determined in accordance with the Article 33 of the Detailed Rules for the Implementation of the Interim Regulations of the People's Republic of China on Value-added Tax.

2.

The determination of the time when tax obligation arises in the case of an enterprise' selling of goods on the commission basis and without a checklist of such goods

(1)

Where a taxpayer sells goods on a commission basis, if it receives the full payment or a partial payment for goods before receiving the checklist of such goods, the time when tax obligation arises shall be the day when it receives the full payment or a partial payment for the goods.

(2)

Where a taxpayer fails to receive any payment for the goods and the checklist within 180 days after the consignment of the goods sold on a commission basis, the sale shall be deemed as completed and the taxpayer shall pay the value-added tax. The time when tax obligation arises shall be the day when the 180th day after the consignment of the goods sold on a commissioned basis expires.

3.

Some issues concerning the offset of the amount of input tax of some particular goods to which value-added tax rates are applied differently in the import link and the domestic link or in different areas within China

Where value-added tax rates are applied differently to some particular goods (such as primary agricultural products and mineral products) in the import link and the domestic link or in different areas within China, a taxpayer shall offset the input tax against the value-added tax in the amount as specified on the special value-added tax invoice and the certificate of the customs for payment of import duties.

Where competent tax authorities find that there are different value-added tax rates applicable to the same goods in the import link and the domestic link or in different areas within China, they shall report the relevant information, level by level, to the common tax authority at the next higher level, which shall give a definite reply.

4.

With regard to the calculation and division of input tax which may not be offset against the value-added tax

If the taxpayer concurrently engaging in any tax exempt item or non-taxable item (excluding fixed assets under construction) is unable to precisely divide the amount of input tax may not be offset , the amount shall be computed according to the following formula:

Amount of input tax may not be offset = (Total amount of input tax of the current month £­ Amount of input tax of the current month that can be precisely divided into taxable items and non-taxable items) ¡Á (Gross sales of the tax-exempt items and the turnover of non-taxable items of the current month ¡ÂAggregate amount of the gross sales and turnover of the current month) £« Amount of input tax of the current month that can be precisely divided into tax-exempt items and non-taxable items

5.

With regard to the change of a general taxpayer of value-added tax (hereinafter referred to as the general taxpayer) into a small-scale taxpayer

Once a taxpayer is formally determined as a general taxpayer, it may not be changed back into a small-scale taxpayer. The change of a general taxpayer within the tutorship period into a small-scale taxpayer shall still be handled according to the relevant provisions of the Urgent Circular of the State Administration of Taxation on Strengthening the Administration of VAT Collection on Newly Established Trading and Commercial Enterprises (No. 37 [2004] of the State Administration of Taxation).

6.

With regard to the inventory and the to-be-offset tax amount when a general taxpayer is cancelled

Where a general taxpayer is changed into a small-scale taxpayer because it is cancelled or disqualified from being a general taxpayer during the tutorship period, its inventory shall not be treated as transfer-out of input and the to-be-offset tax amount shall not be refunded.

7.

With regard to the offset upon transport invoices

(1)

Where a general taxpayer buys or sells any goods (excluding fixed assets outside the Northeast of China) by railway transport and obtains the transport invoice issued by the railway department, if the name of the consigner or consignee indicated on the railway transport invoice is not the same as the name of the taxpayer, but the name of the taxpayer is given in the column of the consigner or the column of remarks of the railway transport invoice (it shall be invalidate if handwritten), the transport invoice may be regarded as a voucher for offset or deduction of the input tax and it is allowed to compute the amount of input tax to be offset.

(2)

The transport freight paid by a VAT general taxpayer in its production or business operations may not be used to calculate the input tax.

(3)

The international goods transport agency invoice and international goods transport invoice that a VAT general taxpayer obtains may not be used to calculate the input tax.

(4)

The transport invoice that a VAT general taxpayer obtains for all the goods it has purchased in an accumulative way is allowed to be used to calculate the input tax if it is accompanied by a transport checklist issued by the transporting enterprise which bears the special seal for finance or for issuing invoices.

(5)

The transport invoice that a VAT general taxpayer obtains but which is insufficiently filled out may not be used to calculate the input tax, with the exception of the transport invoice issued in an accumulative way and accompanied by a transport checklist.

8.

Whether to levy value-added tax on one-time fees collected by taxpayers engaging in public utilities

Where one-time fees collected by a VAT taxpayer engaging in heating, electric power, gas, water supply, and other public utilities is directly related to the sales volume of goods, such fees shall be subject to value-added tax; if they are not directly related to the sales volume of goods, it shall not be subject to value-added tax.

9.

Whether to levy value-added tax on the fees collected by taxpayers on behalf of administrative departments

Where a fee collected by taxpayers on behalf of the relevant administrative department meets all of the following requirements and if it is not an extra?Cprice fee, it is not subject to value-added tax.

(1)

It is approved by the State Council, the relevant department of the State Council, or the government at the provincial level;

(2)

Special voucher has been issued for the administrative charge upon approval of the public finance department;

(3)

Such fee is entirely turned over to the state treasury; or if not turned over to the state treasury, it shall be subject to government supervision and be used for the special purpose as approved.

10.

With regard to the taxation issue relating to the insurance premiums, vehicle purchase tax and license plate fees collected on a commissioned basis

Insurance premiums collected by a VAT taxpayer at the time of selling goods against the buyer for buying insurances for the goods on behalf of the buyer, and the vehicle purchase taxes and vehicle license plate fees collected and withheld by a VAT taxpayer engaged in the sale of vehicles against and on behalf of the buyer, shall not be treated as ex-price fees and thus shall not be subject to value-added tax.

11.

With regard to the issue of levying value-added tax on computer software products

(1)

The built-in software does not fall within the scope of the software products that may enjoy the preferential value-added tax policies as provided in the Circular of the Ministry of Finance and the State Administration of Taxation Concerning Some Taxation Policies for Encouraging the Development of the Software Industry and the Integrated Circuit Industry (Cai Shui [2000] No.25);

(2)

The income derived from the software installation fees, maintenance fees, and training fees which are collected upon the sale of the software product involved shall be subject to value-added tax according to the relevant provisions on mixed selling and may enjoy the preferential value-added tax policy of "refund immediately upon payment";

However, the maintenance fees, technical service fees, and training fees charged by installments or each time when the service is provided after the software product has already been delivered for use shall not be subject to value-added tax.

(3)

For the income derived by a VAT taxpayer for the development of a software products upon the entrustment of anyone else, if of the software product belongs to the client, it shall subject to value-added tax; if the copyright belongs to both the developer and the client shall not be subject to value-added tax.

12.

With regard to the taxation issue concerning printing enterprises entrusted by publishing enterprises to print newspapers, books and periodicals by buying paper themselves

Where a printing enterprise buys paper by itself to print books, newspapers and magazines which have a code number (CN) or an ISBN upon the entrustment of a publisher, such prices it charges for such printing shall be treated as sale of goods and be subject to value-added tax.

13.

Income from membership fees

The membership fees charged from value-added tax taxpayers shall not be subject to value-added tax.

Ministry of Finance

State Administration of Taxation

November 28, 2005