Background
In the wake of China’s VAT reform in recent years, it is not surprising to find that some capital-intensive tech companies are trapped in growing VAT credit reserves due to insufficient output VAT for offsetting input VAT. This happens in instances when a taxpayer is still in its long capex investment period or its output (sale) VAT collection is too low to cover its input (purchase) VAT. Even though a taxpayer is allowed to carry over its excess input VAT credits to the succeeding months, quarters or years, it is less likely it can recover them in the foreseeable future. This symptom of recurrent hefty financing burden is drawing criticism that the VAT reform has not achieved its promise of reducing the tax burden.
New VAT refund policy
The new policy aims at relieving their cash flow pressure by offering them a refund on unutilized VAT credits. Tech firms can now apply for a refund on their leftover VAT credits accumulated so far, unveiled by a tax circular issued by China’s Ministry of Finance (MOF) and State Administration of Taxation (SAT) on June 27, 2018.
The criteria for the applicants include the following:
- They should be tech firms in equipment manufacturing, R&D and modern service industries in 18 listed industries or power grid companies; Priority is given to 10 key sectors listed in the “China Manufacturing 2025” program or those certified high-tech firms; and
- They should have achieved a rating of A or B in their tax record.
The unutilized VAT credit accumulated at the end of each filing period will be refunded, but subject to a cap (being the unutilized input VAT credit balance at the end of 2017). The VAT refund amount is calculated as follows:
- VAT refund = Period-end VAT x refund rate (determined by two means below)
| Applicant’s tax registration date |
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Refund rate |
| |
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| Before or on Dec. 31, 2014 |
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Total VAT credit claimed from 2015 to 2017 from three VAT documents (note) ÷ total input VAT claimed from all VAT documents in the same period |
| |
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| On or after Jan. 1, 2015 |
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Total VAT credit ever claimed from three VAT documents (note) in a filing period ÷ total input VAT claimed from all VAT documents in the same filing period |
Note: The three VAT documents refers to special VAT invoices, import VAT invoices and VAT payment receipts.
Correspondingly, the applicant, if eligible for the said VAT refund, is allowed to pay less VAT-based surcharges, using a lower VAT payment amount (after the refund).
WTS observation
- This VAT refund policy represents a generous and dedicated move by the Chinese government to address the financing issues distinctive for tech firms’ development. It also highlights not only the strategy to realize the potential of tech firms, but perhaps also the attempt to cope with ambitious challenges from overseas competing partners.
- Not all tech firms in the selected sectors can obtain VAT refunds, only those achieving a good tax compliance rating. This sends a signal that compliance is paying off and credit rating is something worthy to pursue by operators.
