China has issued a new document to clarify value-added tax measures that went into effect in Aug. 1, exempting shipping transportation from the law. The measures had caused concern in the shipping and logistics industry both here and in China.
Federal Maritime Commissioner William P. Doyle said the VAT was discussed in October in Chicago at a bilateral maritime consultation meeting that the U.S. and China hold each year.
In August, the National Industrial Transportation League, told the FMC, the Department of State and the U.S. Maritime Administration that the VAT “has created much confusion as to its application and resulting impacts, especially on freight moving between the two countries."
Carlton said China was saying the 6-percent VAT is applicable to domestic shipping, logistics and freight forwarding in China and not specifically to international ocean freight; there were reports that “some ocean carriers and non-vessel operating common carriers (NVOCCs) are simply passing on the tax to their customers in the form of surcharges or service charges even when the freight charges have been 'pre-paid.'"
In a presentation in October to the World Congress of FIATA, the International Federation of Freight Forwarders Associations, Yuntao Yang, the general counsel at Sinotrans and CSC Holdings, said the VAT had increased the burden to freight forwarders and that “numbers of freight forwarders are in danger of deficit due to the increased tax payment.”
The FMC said that on Dec. 13, China released a document Circular 106, which supersedes the original document on the VAT effective Jan. 1, 2014.
"Now that the Circular 106 has been issued, I would like to hear from industry stakeholders their thoughts regarding this latest development in response to their concerns," Doyle said.
The FMC posted the following unofficial summary of Circular 106 posted on its website:
The China Ministry of Finance (MOF) and the State Administration of Taxation (SAT) have now jointly agreed to exempt shipping transportation from their recently implemented VAT law. It is understood the exemption will be retroactive to 1 August 2013, when the current arrangements first came into effect. A joint circular (Caishui 2013 No 106) has been issued by the MOF and SAT explaining the exemption.
Circular 106 removes the unequal tax treatment of foreign shipping companies. 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, this deduction is no longer permitted. Instead, starting from Aug. 1, 2013, they are 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.
A press release on the FMC website provides additional information including a link to the Chinese language document.
Richard Gluck, an attorney at Garvey Schubert Barer, said his assistant and translator tells him “the Chinese language document does not spell out any specifics about the VAT exemption. So, I think it is safe to say that details are still to be published.”