BDO Indirect Tax News

A VAT law adopted by China’s Standing Committee of the National People's Congress on 25 December 2024 will become effective on 1 January 2026, marking the first piece of comprehensive VAT legislation in the country. VAT was originally introduced in China via regulations in the early 1990s and has been expanded over the years in an effort to institute pilot reforms and consolidate disparate rules and make the system more cohesive.

The new law aims to modernise the VAT system, align the rules with international practices and bring all the rules into a single piece of legislation with the overriding goal of standardizing VAT collection and ensuring that taxpayer rights are protected. Although the law revises existing rules, the rate structure and overall framework of the existing system is maintained.

The VAT law defines taxable transactions more clearly and provides more specific guidelines on whether nonresident enterprises are subject to VAT for their operations in China. It updates exemptions by adding and removing items.

Summary of the New VAT Law

The VAT law is comprised of six chapters and 38 articles, with the main changes as follows:

• A taxable transaction in China means the following:
  • For a sale of goods where the origin or location of the goods is China;
  • For a sale or lease of real estate or the transfer of the right to use natural resources where the real estate or natural resources are located in China;
  • For a sale of financial commodities where the financial commodities are issued in China, or the seller is an entity or individual in China; and
  • For a sale of services or intangible assets where the services or intangible assets are consumed within China or where the seller is an entity or individual in China.
• The following will be regarded as a taxable transaction subject to VAT:
  • The use of self-produced or commissioned processed goods for collective welfare or personal consumption by entities and individual industrial and commercial households;
  • The transfer of goods by entities and individual industrial and commercial households for no consideration; and
  • The transfer of intangible assets, real estate or financial commodities for no consideration by entities and individuals.
• Where a taxable transaction involves more than two tax rates, the rates will be applied in accordance with the main business of the taxable transaction. Where a taxpayer engages in two or more taxable transactions involving different rates, it will be required to separately account for the sales to which the different rates apply, and if the rates are not separately accounted for, the higher tax rate will apply.
• Non-deductible input VAT includes the following:
  • Input tax corresponding to items subject to the simplified tax calculation method;
  • Input tax corresponding to VAT-exempt items;
  • Input tax corresponding to items with abnormal losses;
  • Input tax corresponding to goods, services, intangible assets and real estate purchased and used for collective welfare or personal consumption;
  • Input tax corresponding to catering services, residents' daily services and entertainment services purchased and directly used for consumption; and
  • Any other input taxes specified by the State Council.
• The new VAT law includes a list of supplies that are exempt from VAT and notes that the standards for the exemptions will be prescribed by the State Council.
• If the sales amount is clearly low or high without justification, the Chinese tax authorities may determine the sales amount in accordance with the Law on Tax Collection and Administration and relevant administrative regulations.
• The tax authorities will establish mechanisms for sharing VAT-related information and for collaboration with authorities of industry and information technology, public security, customs, market regulation, the People's Bank of China, financial regulatory authorities and other authorities.

BDO Insights

In addition to the above, the new VAT law makes revisions to the wording of many VAT rules, and affected businesses should be aware of these changes. For example:

• The law contains a clear definition of “deemed sales,” so the tax authorities will likely focus on the treatment of such sales for VAT purposes in future tax audits.
• The clarity around the circumstances in which input VAT is not deductible means that the tax authorities will pay more attention to the treatment of non-deductible VAT in future audits.
• The law has updated VAT exemptions by adding and removing items. Affected businesses should consider reviewing the relevant VAT treatment after implementation of the VAT law or engaging a third-party professional to make an assessment to minimise potential VAT risks.

With the issuance and implementation of the VAT Law, tax authorities have also established VAT-related information sharing mechanisms and coordination mechanisms with industry and information technology, public security, customs, market supervision and administration, the People's Bank of China, financial supervision and administration, etc. Given the impending changes to the VAT rules and compliance obligations, affected enterprises should begin now to review their processes and internal systems and take any needed steps to strengthen their financial management and compliance steps to be prepared for the new legal environment and avoid unnecessary tax risks arising as a result of the new VAT law.

Gordon Gao
Jack Shen
BDO in China