China reviews VAT regime after complaints

21 August 2013

Government officials have agreed to review tax practices and reflect on the industry opinions

Dear Valued Customer,

Re: The 6% Value-Added Tax (VAT) introduced on 1 August, 2013.

Policymakers in Beijing are reviewing and seeking ways to improve China’s value-added tax regime, which had prompted complaints from shipping industry players at home and abroad since it was rolled out nationwide on August 1.

Officials from the China Shipowners’ Association, China International Freight Forwarders Association, China Shippers’ Association and some trading and shipping-related companies met the Chinese tax authorities earlier this week and complained of a higher tax burden in the new system.

In response, government officials from the Ministry of Commerce, Ministry of Finance and State Administration of Taxation have agreed to review tax practices and reflect on the industry opinions, according to a web post from CSA.

"The authorities are as worried as industry players over the current situation. We have had discussions and reflections in our attempts to find out where the problems lie," said he post, citing government departments.

"The initial analysis is that the issue originates from tax refunds. The industry voice is we should exempt [shipping] from the tax. We understand the benefits in the argument but there are difficulties in auditing and working out practical ways. Nonetheless we will carefully consider this."

Beijing has long stated that the shift from business tax to VAT, one of China's flagship tax reform projects for the 2011-2015 period, is aiming to reduce overall tax burden and essential for modernising the Chinese tax regime.

However, many China-based players have found that their tax payables jump by 20% or more in practice, according to CSA vice-chairman Zhang Shouguo. The problem has several facets.

China has adopted a zero-rate VAT policy for international shipping service providers, in effect exempting them from the levy. Domestic shipping, time charterers, freight forwarders, cargo and ship agents and port firms are liable to a 6% VAT while bareboat financial lessors face a 17% rate, but they receive the same amount of tax credits that can sometimes be used when purchasing goods and services.

Not many have enjoyed the zero rate in practice, however. For one thing, local tax authorities at times are not familiar with the procedures so they are not willing to accept the applications for exemption, according to a KPMG official.

Moreover, few shippers settled their bills with carriers outright. Most lines need to charge freight via agents, which cannot receive tax credits due to the zero rate but need to pay an extra 6% VAT. They have to either swallow the increased expenses or impose the tax on shippers, which would then turn to offshore agents to save tax. "If most companies are settling their bills offshore, the [domestic] players will face a dismal future. More importantly, national interests and tax incomes will be hit hard," said the post, citing the Chinese trade groups.

Another issue for Chinese carriers is that they have few chances to use their tax credits due to limited newbuilding projects, so the VAT scheme increases actual tax payables. “We hope the credits can be used to deduct depreciation costs of existing fleets as well, which can give owners some relief,” Mr Zhang told Lloyd's List. Further complicating the matter is that foreign carriers often need to establish subsidiaries in China — which are legally seen as freight forwarders — to collect freight, in effect making them liable to a 6% VAT when providing international shipping services. This has resulted in unequal treatment for Chinese and foreign lines, the European Union Chamber of Commerce in China said.

Also, the National Industrial Transportation League, which represents shippers in the US, has requested Washington to seek clarification from Beijing over the VAT issue after some companies faced higher shipping costs in the new regime.

The Hong Kong Liner Shipping Association, said shipping should be exempted from VAT. "Around the world, it is not typical there is a VAT on shipping. We don’t believe there should be one in China either."

Some industry officials believe that given time, the problem can be solved. Mr Zhang said Chinese players were advocating that the 6% rate should be applied to the net incomes or commissions of freight forwarders and ship agents rather than their revenues, a measure that can partly reduce tax burden for both Chinese and foreign players based in China. Should you wish to discuss the above and your Incoterms please don’t hesitate to contact your Account Manager.

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