China Defines Software Products Eligible for VAT Refunds; Plans To Introduce VAT in Shanghai 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. According to an earlier notice (Circular 25) 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. Now, immediate VAT refunds can be obtained if their VAT payable exceeds three percent of their sales amount. Software products eligible for VAT As specified in Circular 100, “Software products” refers to information processing systems which include: •
Computer software products
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," said Dr. Shan Nair, CoFounder of NAir & Co. 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, however, does not specify how CIT will play out on the VAT refunds. Circular 4, which was issued at the beginning of 2011, was aimed at encouraging the development of China’s software and semiconductor industries which have been enjoying various tax incentives since the mid-1980s. But, 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 will now enable these sectors to claim VAT refunds to a certain extent. Pilot VAT Program in Shanghai In an effort to invigorate certain industry sectors, the Chinese government will be introducing VAT as a pilot program in Shanghai starting January 1, 2012. 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. Who will be affected? "It's the services sector in Shanghai that will lose out initially due to having little opportunity to claim VAT credits when compared to certain other more VAT-friendly sectors like manufacturing. But, eventually it will be the end-customers who will be most affected, having to pay the extra money out of their pockets," said Dr. Shan Nair, Co-Founder of Nair & Co. It is still to be known whether this will apply only to businesses headquartered in Shanghai, or also to branches operating in Shanghai.
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