Announcement on Policies for Deepening the VAT Reform

In order to implement the decisions and deployment made by the Central Committee of the Communist Party of China ("CPC") and the State Council, and to promote substantial cuts of value-added tax ("VAT"), matters concerning the VAT reform in 2019 are hereby announced as below:

I. For general VAT payers' sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the applicable VAT rate is adjusted to 13% or 9% respectively.

II. For the agricultural products purchased by taxpayers to which an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; and for the agricultural products purchased by taxpayers for production or commissioned processing, which are subject to VAT at 13%, the input VAT will be calculated at a 10% deduction rate.

III. For the exportation of goods or labor services that are subject to VAT at 16%, with the applicable export refund at the same rate, the export refund rate is adjusted to 13%; and for the exportation of goods or cross-border taxable activities that are subject to VAT at 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%.

For a taxpayer's exported goods and labor services mentioned in the previous Sub-item , as well as its cross-border taxable activities mentioned in the previous Sub-item by June 30, 2019 (including those occurred by April 1, 2019), if the measures for VAT exemption or refund are applicable and VAT has been levied at the time of purchase at the pre-adjusted rate, the pre-adjusted export refund rate should be adopted; if VAT has been levied at the adjusted rate at the time of purchase, the adjusted export refund rate should be adopted accordingly. If the measures for VAT exemption, credit or refund are applicable, the pre-adjusted export refund rate should be adopted, and the difference between the applicable tax rate and the export refund rate should be deemed to be zero in calculating the VAT exemption, credit or refund if the applicable tax rate is lower than the export refund rate.

The effective date of the adjusted export refund rates as well as the date of exportation of goods and labor services or the occurrence of cross-border taxable activities should be determined according to the following provisions: for the goods and labor services exported upon customs declaration (except for those exported from or via bonded zones), the export date specified on the customs declaration form for export should prevail; for the goods and labor services exported or cross-border taxable activities carried out without customs declaration, the issuance date of the export invoice or general invoice should prevail; for the goods exported from or via bonded zones, the export date specified on a record-filing list of exported goods issued by customs at the time when such goods leave the country should prevail.

IV. For the goods purchased by overseas visitors to which the applicable VAT rate is 13%, the departure tax refund rate is 11%; and for the goods purchased by overseas visitors to which the applicable VAT rate is 9%, the departure tax refund rate is 8%.

By June 30, 2019, if goods are taxed at the pre-adjusted VAT rate, the pre-adjusted tax refund rate should be adopted; while the adjusted tax refund rate should be adopted if goods are taxed at the adjusted VAT rate.

The effective date of tax refund rates should be determined based on the issuance date of the general VAT invoices for the goods entitled to tax refund.

V. As from April 1, 2019, Sub-item 1, Item 4, Article 1 and Sub-item 1, Item 1, Article 2 of the Provisions on Matters Concerning the Pilot Collection of Value-Added Tax in lieu of Business Tax (Cai Shui [2016] No. 36) shall be repealed, and no input VAT on the immovable properties or the immovable properties under construction in progress obtained by taxpayers may be credited any longer in two years. However, the input VAT to be credited that has not been fully credited yet according to aforesaid provisions may be credited against the output tax in the tax period from April 2019.

VI. Where a taxpayer purchases domestic passenger transportation services, its input VAT is allowed to be credited against its output tax.

i. If the taxpayer fails to obtain a special VAT invoice, its input VAT should be determined for a time according to the provisions below:

1. In the case that the taxpayer has obtained an electronic general VAT invoice, its input VAT should be the tax amount indicated on the invoice;

2. In the case that the taxpayer has obtained an itinerary of E-ticket for air transport with passenger identification information, its input VAT should be calculated under the following formula:

Input VAT on air passenger transport = (ticket price + fuel surcharge) ÷ (1+9%) × 9%

3. In the case that the taxpayer has obtained a railway ticket with the passenger identification information, its input VAT should be calculated under the following formula:

Input VAT on rail passenger transport = fact value of the ticket ÷ (1+9%) × 9%

4. In the case that a road, waterway or other passenger ticket with the passenger identification information is obtained, its input VAT should be calculated under the following formula:

Input VAT on road, waterway or other passenger transport = fact value of the ticket ÷ (1+3%) × 3%

ii. "Purchased passenger transportation services, loan services, catering services, routine services for residents and entertainment services" mentioned in Item 6, Article 27 of the Implementation Measures for the Pilot Collection of Value-Added Tax in lieu of Business Tax (Cai Shui [2016] No. 36) and in Sub-item 5, Item 1, Article 2 of the Provisions on Matters Concerning the Pilot Collection of Value-Added Tax in lieu of Business Tax (Cai Shui [2016] No. 36) should be superseded by "purchased loan services, catering services, routine services for residents and entertainment services".

VII. From April 1, 2019 to December 31, 2021, a taxpayer engaged in production or livelihood services is allowed to have a 10% weighted deduction of creditable input VAT in the current period from the tax amount payable (hereinafter referred to as the "Weighted Deduction Policy").

i. "A taxpayer engaged in production or livelihood service" mentioned in this Announcement refers to any taxpayer whose sales from providing postal service, telecommunications service, modern service or livelihood service (hereinafter referred to as "Four Services") accounts for more than 50% of its total sales. The specific scope of the Four Services should be determined according to the Notes to the Sale of Services, Intangible Assets and Immovable Properties (Cai Shui [2016] No. 36).

As from April 1, 2019, the Weighted Deduction Policy applies to any taxpayer incorporated before March 31, 2019 if its sales in the period from April 2018 to March 2019 (sales of the actual operation period if its business operation lasts for less than 12 months) meets the aforesaid criteria.

The Weighted Deduction Policy applies to any taxpayer incorporated on or after April 1, 2019 from the date when it is registered as a general taxpayer if its sales of three months from the date of incorporation meets the aforesaid criteria.

Once a taxpayer is determined to be eligible for the Weighted Deduction Policy, no adjustment will be made in the current year, and its eligibility in the following years should be determined based on its sales for the previous year.

The weighted deduction amount that a taxpayer may be provided for but has not so done yet is allowed to be provided for together with others at the period when it is determined that the Weighted Deduction Policy applies.

ii. A taxpayer should make the weighted deduction provision in the current period at 10% of the current-period creditable input VAT. No weighted deduction amount may be provided for input VAT not creditable against the output VAT according to existing provisions. If the input VAT with the weighted deduction provision is transferred out as required, the weighted deduction amount should be decreased accordingly in the current period when the input VAT is transferred out. The formula is as below:

Weighted deduction provision in the current period =current-period creditable input VAT×10%

Weighted deduction amount deductible in the current period = balance of weighted deduction amount at the end of previous period + weighted deduction provision in the current period –weighted deduction amount decreased in the current period

iii. Taxpayers shall, after calculating the tax amount payable under the general taxation method according to existing provisions (hereinafter referred to as "pre-deduction tax amount payable"), make weighted deductions as follows:

1. If the pre-deduction tax amount payable is zero, all the deductible weighted deduction amount in the current period should be carried forward to the next period for deduction;

2. If the pre-deduction tax amount payable is a positive number and higher than the deductible weighted deduction amount in the current period, then all the deductible weighted deduction amount for the current period should be deducted from the pre-deduction tax amount payable; or

3. If the pre-deduction tax amount payable is a positive number and less than or equal to the deductible weighted deduction amount in the current period, then the deductible weighted deduction amount in the current period should be deducted from the tax amount payable, till the balance of the tax amount payable is zero. And the balance of the deductible weighted deduction amount in the current period may be carried forward to the next period for continuous deduction.

iv. If the Weighted Deduction Policy is not applicable to the exportation of goods and labor services or cross-border taxable activities carried out by a taxpayer, no weighted deduction amount may be provided for the corresponding input VAT.

If a taxpayer exports goods and labor services and carries out cross-border taxable activities concurrently, and cannot determine the input VAT for which the weighted deduction provision is not allowed, the calculation should be made under the following formula:

Input VAT for which the weighted deduction provision is not allowed = all input VAT unable to be determined in the current period × sales from export of goods and labor services and cross-border taxable activities in the current period ÷ all sales in the current period

v. Taxpayers shall separately calculate changes in provision, deduction, decrease and balance of the weighted deduction amount. Any taxpayer who commits fraud in claiming eligibility for the Weighted Deduction Policy or falsely increases the weighted deduction amount will be penalized in accordance with the Law of the People's Republic of China on the Administration of Tax Collection and relevant provisions.

vi. When the Weighted Deduction Policy expires, taxpayers shall no longer make the weighted deduction provisions, nor shall they continue the deduction of the balance of the weighted deduction amount.

VIII. The pilot system for refunding the period-end excess VAT paid shall take effect on April 1, 2019.

i. Any taxpayer who meets all of the following criteria may apply with competent tax authorities for the refund of its incremental overpaid VAT:

1. From the tax period of April 2019, the incremental overpaid VAT for each of six consecutive months (two consecutive quarters if taxed quarterly) is a positive number, and the incremental overpaid VAT in the sixth month is not less than 500,000 yuan;

2. Its taxation credit is rated as A or B;

3. It has not committed fraud for overpaid VAT refund or export refund or falsely issued special VAT invoices for 36 months before its claim for VAT refund;

4. It has not been penalized by tax authorities for two or more times for tax evasion for 36 months before its claim for VAT refund; and

5. It fails to enjoy the policy of refund upon levy or refund-after-levy from April 1, 2019.

ii. For the purpose of this Announcement, "incremental excess VAT paid" refers to the increased period-end overpaid VAT compared to that at the end of March 2019.

iii. Any taxpayer's incremental excess VAT paid that is allowed to be refunded in the current period should be calculated under the following formula:

Refundable incremental excess VAT paid = incremental excess VAT paid × proportion of input VAT × 60%

Proportion of input VAT refers to the proportion of VAT indicated in the special VAT invoices (including the machine-printed uniform invoices for motor vehicle sales) that have been credited, special VAT payment forms issued by customs for import and tax payment vouchers in a tax period from April 2019 to the claim for VAT refund in all the input VAT that has been credited in the same period.

iv. Taxpayers shall apply with tax authorities for the refund of the excess VAT paid within the period for filing VAT returns.

v. For the export of goods and labor services or cross-border taxable activities carried out by a taxpayer, to which the measures for VAT exemption, credit or refund are applicable, the taxpayer may apply for the refund of the excess VAT paid, given that it still meets the criteria specified in this Announcement after completing the formalities for VAT exemption, credit or refund; if the measures for VAT exemption or refund are applicable, the relevant input VAT should not be used to refund the overpaid VAT.

vi. Taxpayers shall decrease the overpaid VAT in the current period accordingly after they obtain the refund of the overpaid VAT, and they may continue to apply with tax authorities for refunding the overpaid VAT if they satisfy again the VAT refund criteria according to this Article, provided that the consecutive period specified in Sub-item 1, Item 1 of this Article should not be calculated repeatedly.

vii. With regard to any taxpayer who obtains the refund of overpaid VAT by falsely increasing input VAT, making false declaration or committing other frauds, the refund falsely obtained will be recovered by tax authorities, and the taxpayer will be penalized according to the Law of the People's Republic of China on the Administration of Tax Collection and relevant provisions.

viii. The burden sharing mechanism between central government and local governments for the refund of the incremental excess VAT paid will be notified separately.

IX. This Announcement shall come into force on April 1, 2019.

Announcement is hereby made.

Ministry of Finance, State Taxation Administration, General Administration of Customs

March 20, 2019