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Chinese Circular Addresses Foreign Importers' VAT Woes

by Mary Swire, Tax-News.com, Hong Kong

20 December 2013


The United States' Federal Maritime Commission (FMC) has released preliminary guidance following the publication of a new circular by Chinese authorities, which confirms the introduction of a VAT exemption to remove the extra tax burden faced by foreign shipping companies.

After engaging in lengthy consultations with China, the FMC confirmed that the Circular – which is expected to have retroactive effect from August 1, 2013 – removes the VAT burden incurred by foreign shipping companies on freight forwarding charges. The announcement from China may open up the opportunity for foreign shipping companies to obtain a refund of overpaid tax, the FMC hopes.

Immediately after the release of the Circular, the FMC worked with a number of parties, including the US Embassy in Beijing, to provide an unofficial translation of the circular (Caishui 2013 No. 106) on December 19, 2013. The FMC understands from this unofficial translation that: "Circular 106 removes the unequal tax treatment of foreign shipping companies."

Summarizing the situation, the FMC explained: "Chinese law requires foreign shipping companies to use either wholly-owned subsidiaries or third-party agents to collect ocean freight, while Chinese shipping companies can charge shippers directly without engaging a freight forwarder. Under the previous Business Tax regime, freight forwarders were allowed to deduct international freight from their taxable income. However, under Circular 37 [which introduced the contentious VAT rules,] this deduction is no longer permitted. Instead, starting from August 1, 2013, [foreign shipping companies were] required to pay a 6 percent VAT charge, as well as local surcharges (including the urban maintenance and construction tax, education levy and local education levy) on gross proceeds collected from clients, which means the foreign shipping companies end up bearing more tax burden than Chinese shipping companies."

"In attachment 2 of Circular 106, the deduction of international freight from the taxable income of freight forwarders is allowed, which draws the cost of foreign shipping companies back to the same level as domestic shipping companies," the FMC said.

In August 2013, VAT was expanded nationwide in China for the first time, covering the transportation industry and six modern services sectors (research and development, information technology, cultural and creative industries, logistics, and authentication and consulting services).

TAGS: compliance | VAT rates | VAT tax authority guidance | tax | marine | value added tax (VAT) | law | China | tax authority | education | United States | construction | VAT compliance matters | Tax

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