A value-added tax (VAT) will be applied to transportation and logistics services throughout China, starting today, Aug. 1.
“In 2012, China reformed its existing VAT system by integrating the business tax (BT) into the value added tax (VAT),” according to a memorandum provided to American Shipper
by Zhen Xie, Carlos Rodriguez, and Robert Stang of the Washington office of law firm Husch Blackwell.
The 2012 reforms were initially limited to Shanghai and gradually rolled out to another 10 regions, including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen.
In April, the Chinese government determined “the limited application of the VAT pilot distorted competition, and called for the nationwide application of the VAT program,” explained MIQ Logistics of Overland Park, Kan., in a notice to its customers.
It said “under the VAT pilot, forwarders and other transportation providers could effectively invoice international transportation and freight forwarding services as ‘VAT Inclusive’ – without billing the VAT to client shippers," but Circular 37, the document which lays out changes in VAT policy prohibits that practice and effective Aug. 1, the 6 percent VAT will be collected from clients on air and ocean freight charges payable within China.
MIQ said the VAT will be collected on behalf of and remitted to the government and it will impact all transportation costs, freight forwarding charges and related services and handling fees.
Transportation providers and professionals said there's lack of clarity on some points in the new tax law.
"Although the reformed VAT appears to be a more simplified tax structure,
companies are cautioned to seek the assistance of experienced
professionals when assessing amounts owing (or amounts billed from the
VAT payer),” said the Husch Blackwell attorneys.
VAT rates were set at 11 percent for transportation and 6 percent for so-called “modern” logistic services, according to the law firm. It said transportation services include moving cargo or passengers by land (other than railway), water, air and pipeline. Logistics services include those provided by ocean transport intermediaries such as those provided by forwarders, non-vessel-operating common carriers, ports and other freight services.
There should not be much confusion as to what is a transportation service and what's a logistic service, said Frank Sangster, head of the international indirect taxes group at KPMG LLP, because a similar distinction was made under the old business tax regime.
Sangster said business taxes of 5 percent for logistics and 3 percent for transportation were usually rolled into the prices charged by transportation and logistics providers in China and, with the VAT, those charges may be more transparent to buyers of those services.
He said with the switch over to VAT, shippers are likely to engage in discussions of whether they are paying a tax on service that already had the business tax “baked into” the price or the price they now have to pay VAT on has been appropriately adjusted.
Sangster said China wanted to remove the hidden cost of the business tax and, through use of a VAT, encourage business and reduce the cost of trade. The expectation, he said, is that growth in business, profits, income tax, and tax on consumers will offset any loss of revenue from the business tax.
The tax applies to freight movements in China. Businesses that are charged VAT may be able to offset the charge with VAT they collect from their customers.
Liner carrier Maersk Line said “ocean transport service providers, including Maersk (China) Shipping Co. Ltd., are required to implement the tax policy that will be effective as of 1st August 2013 in order to be legally compliant."
In its Weekly Highlights
newsletter for customers, Maersk said “due to significant uncertainty surrounding the implementation of this policy over the past month, as a commercial consideration, Maersk Line has decided to maintain existing invoicing arrangements towards customers and absorb the VAT on customers’ behalf" from Aug. 1 to Aug. 14.
But it said from Aug. 15, "an additional 6 percent VAT will be levied by Maersk (China) Shipping Co. Ltd. on top of the freight and all other charges payable in Mainland China.”
“As we understand it today, shippers who are being billed for any of their freight or other charges in China, those charges or costs will have the 6 percent applied, based on the new tax policy from the Ministry of Taxation in China,” said Timothy Simpson, a spokesman for Maersk. “For charges that are billed and paid in areas outside of China, the 6 percent VAT would not be applied.”
Husch Blackwell noted companies may be able to make various deductions, including:
- VAT indicated in the VAT invoices (including cargo transportation VAT invoices and taxation-monitored automobile sales invoices) provided by sellers or providers.
- VAT indicated as paid in Chinese Customs VAT certificates applicable to imports.
- For purchase of agricultural products, in addition to the above two bullet points, 13 percent of the sales prices as indicated in the invoices.
- For rail services, 7 percent of the transportation fees.
- For taxable services provided by overseas entities or individuals, VAT indicated in certificates of tax payments provided by any tax agencies or domestic agents.
“Additional issues may arise depending on the nature of the service provider’s presence in China," Husch Blackwell said. "To provide taxable services in China either the service provider or the receiver of the services must be in China. If a foreign entity or individual, who provides taxable services in China, has an agent in China, the agent is obligated to withhold the VAT, and if such entity or individual does not have any agent in China, the service receiver in China is obligated to withhold the VAT. In the event of an applicable bilateral tax treaty between China and a country where either the service provider or service receiver is located as the case may be, the treaty shall prevail in case of any conflict." - Chris Dupin