The pilot VAT program put in place in January 1, 2012 was expanded nationally on August 1, 2013. The long-awaited administrative measure on VAT exemption for cross border services would now allow companies in China to follow the prescribed procedures to obtain VAT exemption on previously non-zero-rated service revenue from cross-border international transportation and “modern services” within the scope of the pilot VAT program.

Services that may benefit from this new administrative measure include R&D and design services provided to foreign service recipients.

Certain services such as consultancy services in respect of immovable properties or goods located in China are fully subject to VAT even if provided to foreign service recipients.

Services such as exhibition and advertising services are VAT exempt only if performed overseas and regardless of whether the service recipient is Chinese or foreign.

International transportation services are either zero-rated or VAT exempt depending on whether the service provided is a general VAT taxpayer with relevant licenses or a small-scale VAT taxpayer.

Zero rating means that service provider in China does not have to charge output VAT on cross-border services and also can apply for a refund of its related input VAT.

Exemption means that the service provider does not have to charge output VAT on cross-border services, but cannot apply for any refund of its related input VAT. In general, zero-rating is more beneficial to the taxpayer.

What is the required documentation to enjoy VAT exemption on cross-border services?

Companies need to complete a recordal procedure with the tax authority and provide a written cross-border service agreement between the Chinese service provider and the foreign service recipient with proof of foreign location of the service recipient.

What kind of record keeping is required?

• VAT-exempt service revenue and corresponding non-creditable input VAT should be separately accounted for

• Special VAT invoices should not be issued for VAT exempt service revenue

• The VAT-exempt revenue should be received from abroad.

Next Steps to Take

A Chinese company providing VAT-exempt cross-border services should consider the following steps:

• Prepare and update cross-border service agreements to comply with the scope of the pilot VAT program

• Document the service revenue that is paid from abroad

• Separately and accurately account for VAT-exempt service revenue and related input VAT.

• Comply with requirements of the recordal procedure.

• Ensure relevant agreements and documents are translated into Chinese.