People’s Republic of China Provides Clarity to its Recently Implemented Value Added Tax Measures

Last week Commissioner William P. Doyle of the Federal Maritime Commission briefed the full Commission with a report on his work seeking clarity and certainty on the People’s Republic of China’s (PRC’s) implementation of the Value Added Tax (VAT) as it relates to maritime commerce. Doyle informed the Commission that the Chinese government was expected to clarify its position on the VAT that has confused the shipper and carrier communities. On December 13, 2013, the PRC released Circular 106, which supersedes Circular 37 effective January 1, 2014.

Commissioner Doyle stated, “This is good news. This Circular is a result of efficient and organized cooperation between agencies in both the United States and China.” He continued, “President Obama has urged government officials to focus on increasing regulatory cooperation between the U.S. government and the governments of other countries. And that is what we have done together.”

On May 1, 2012 President Obama issued Executive Order 13609, titled Promoting International Regulatory Cooperation.

Commissioner Doyle has been working with the U.S. State Department through its officials in DC, the U.S Embassy in Beijing, and the U.S. Consulate in Shanghai. Together, the FMC and State Department have been seeking guidance on the VAT through China’s Ministry of Transport, its Ministry of Finance and China’s State Administration of Taxation. Doyle also had discussions on the VAT with officials from China’s Ministry of Transport this week during the Global Maritime Regulatory Summit, held at FMC headquarters on Tuesday.

In August, the National Industrial Transportation League, among others, asked the FMC to seek clarity on carriers charging shippers a fee for handling the VAT. At the Commission’s September 2013 meeting, the FMC announced that it would look into ways to obtain further clarity on how China was implementing the tax. Commissioner Doyle ensured that the VAT was on the agenda and discussed at this year’s Annual U.S. Bilateral Maritime Consultation Meetings with the People’s Republic of China. The Bilateral Consultations took place in Chicago on October 28, 2013.

“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 concluded.

Commissioner William P. Doyle’s Briefing to the full Commission can be found here: http://www.fmc.gov/doyle_u.s.-china_bilateral_consultation/

The Central People’s Government of the People’s Republic of China posted Circular 106, as issued:http://www.gov.cn/zwgk/2013-12/13/content_2547300.htm

The FMC and State Department are continuing to consult with Chinese officials and industry stakeholders to understand the provisions of the Chinese language circular.

Below is the current unofficial summary of Circular 106:

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 August 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.

Appendix III of Circular 106 provides exemption for International Cargo Transportation Agency services. It requires all the settlements shall be done via financial institutions. The agencies can issue the VAT normal invoices in full amount to their clients. The rule is retrospectively effective from 1 August 2013. However, if the agencies already issued VAT special invoices, it needs to collect all the special invoices back before it can enjoy such exemption treatment.

Appendix II of Circular 106 provides the definition of International Cargo Transportation Agency services. It also provides the net basis method which allows the deduction of the international transportation fee payable to international transportation service providers from the total service fee to calculate the VAT. International cargo transportation agency service shall refer to the business activities in which the agents, as entrusted by the consignee of goods or its agent, the consignor of goods or its agent, owner of the transportation vehicle, charterer of the transportation vehicle or operator of the transportation vehicle, in the name of the entrusting parties or in their own name, under the prerequisite of not directly providing goods transportation services, carry out businesses relating to goods and shipping agency such as international transportation of goods, transportation vehicle moving to and out of the port, arranging pilotage, berthing, loading and unloading, etc for the entrusting parties.