On 31 December 2019 the State Administration Taxation (SAT) published information about new VAT collection policies, including new VAT regulations and clarifications related to certain regulations. The most important of these announcements relate to the cancellation of the time limit for input VAT verification and new rules relating to the component ratio calculation for incremental VAT refunds. The announcement provides details about clarifications through VAT rulings during the past years, helping taxpayers in their daily operations.
Currently, the time limit for input VAT verification for a general VAT payer is 360 days. In other words, any input VAT invoices obtained must be verified in the tax system within 360 days of the date of their issuance. If an invoice is not verified within this period, it cannot be credited.
From 1 March 2020, the 360-day verification time limit will no longer apply. The new ruling stipulates that for VAT invoices issued after 1 January 2017, they can be credited without term of validity. For the invoices issued before 31 December 2016, they can be credited against output VAT if certain criteria are met. For example, if a taxpayer found an uncredited VAT invoice on 1 February 2020, which was issued on 3 January 2017, it cannot be credited now until 1 March 2020.
From a practical perspective, this change is good news for taxpayers because it provides more flexibility and convenience. Such treatment leaves taxpayers sufficient time to control their business arrangement timeline, including all flows (for example, the flow of payment, flow of invoices, and so on) from different departments (for example, warehouse, procurement, finance, and so on) to gather at the accounting end. In other words, it leaves taxpayers more response time for Standard Operation Procedures (SOPs) within the procurement cycle, making internal control design much easier.
Based on our past experience, due to inefficient internal turnover between departments, many enterprises have expired VAT invoices, which means the enterprises have additional costs. Even now, some taxpayers still have expired VAT invoices in hand that cannot be claimed as credits under old VAT rulings. Since detailed implementation rules for applying the new rule have not been announced yet, we suggest management seek advice from a professional agent to keep up-to-date on the new rulings related to expired VAT invoices and to prepare for application of new rules in the future.
Starting 1 June 2019, if applicable criterion are met, certain advanced manufacturing taxpayers are eligible to claim the total amount of their incremental uncredited VAT refund from July. Taxpayers in other industries are eligible for similar tax treatment, though stricter criterion apply and the refund rate is lower. From the formula, the refund would be calculated as follows:
The refund = (new incremental uncredited tax) x (input VAT component ratio) x (refund rate).
The input VAT component ratio refers to the percentage of the creditable input VAT supported by VAT special invoices, customs importation VAT certificates, and withholding tax clearance certificates to the total creditable input VAT for the period 1 April 2019 through the tax assessment period preceding the refund application.
The new tax ruling further clarified that input VAT transferred out is not required to be deducted when the component ratio is calculated. This will be great news for Chinese taxpayers.
As we all know, any input VAT generated for non-VAT-able items is not allowed to be credited against output VAT. For example, input VAT arising from purchases for staff benefits, VAT exemption items, and so on, must be exclusive from the total creditability amount in a taxpayer’s monthly VAT filings. However, these amounts must be excluded when calculating the component ratio for refund purpose. In other words, the new policy will allow the amount of input VAT transferred out to be included when calculating the input VAT component ratio. This will simplify the application procedure and increase the total refundable VAT taxpayers.
As mentioned above, these announcements are good news for enterprises that have large amounts of uncredited incremental VAT and that purchase lots of non-VAT-able items. We recommend management periodically review VAT tax filings and purchase lists to assess the possibility of gaining the benefit of such preferential tax treatment. We also suggest management engage qualified tax professionals to assist in reviewing application procedures to optimise the effective VAT rate.
BDO China’s International Tax Service team is experienced handling relevant VAT matters and we provide professional indirect tax advice for both foreign and Chinese enterprises. We monitor the rapid changes in China’s regulatory environment and keep our clients up-to-date.
For further information on any of the information here, please do not hesitate to contact us.
Gordon Gao
gordon.g@bdo.com.cn
Grace Wu
grace.wu@bdo.com.cn