Software Products Entitled For Vat Refunds In China

China's Ministry of Finance (MoF) and the State Administration of Taxation (SAT)

issued a circular detailing Value Added Tax (VAT) incentives for software products and clarified certain implementation issues. Circular 100 which was released on October 13, 2011, will be effective from January 1, 2011 retrospectively. As per an earlier notice issued by the government, VAT can be charged at the full rate of 17 percent by general taxpayers on the sale of software products developed by them. If their VAT payable exceeds three percent of their sales amount, then immediate VAT refunds can be obtained.

Software products eligible for VAT

Software products refer to information processing systems which include computer software products, information systems and embedded software products. The effort to clarify VAT incentives and VAT refund calculation methods for software products will help boost investment in the sector. However there is uncertainty on how the Corporate Income Tax (CIT) will be calculated on the refund amount. While Circular 25 stipulates that if a VAT refund is used for R&D it will be treated as non-taxable revenue for Corporate Income Tax (CIT), Circular 100, does not specify how CIT will play out on the VAT refunds.

Circular 4 was aimed at encouraging the development of Chinas software and semiconductor industries which have been enjoying various tax incentives since the mid-1980s. However, they have not been very successful in claiming VAT refunds as the scope of products that are eligible for VAT was not well defined by the government. Circular 100 enables these sectors to claim VAT refunds to a certain extent.

VAT Program in Shanghai

Starting January 1, 2012, in an effort to invigorate certain industry sectors, the Chinese government will be introducing VAT as a pilot program in Shanghai. The targeted industry sectors are transportation and "certain modern services". The State Council has been implementing incremental reforms since many years to replace Business Tax (BT) with Value Added Tax (VAT) in the PRC. The new applicable VAT rates are 11 percent and six percent, although it is still unclear as to what type of services will be subject to these new rates.

When doing business overseas financial benefits can be a critical factor. The objective of any business is no doubt making profits. With any incentives that a government offers, it becomes more attractive for a company to set up a business there. Partnering with an expert can help tremendously in understanding the complexities of taxation be it VAT or global transfer pricing, or regulatory filings.

by: brianwarren

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