China Unveils New VAT Deduction for Advanced Manufacturing Firms


China’s tax authorities have introduced an additional 5 percent value-added ta(VAT) deduction aimed at advanced manufacturing companies, based on their deductible input VAT for the current tax period. Analysts have projected that this fresh policy could result in a 20 percent reduction in tax liabilities for qualifying firms.
We present an overview of the prerequisites and the implementation process for this recently unveiled Chinese VAT policy.
On September 3, 2023, China’s State Tax Administration (STA) declared a new tax deduction initiative designed for companies operating within the advanced manufacturing sector. The policy’s implementation period spans from January 1, 2023, to December 31, 2027.Tian Zhiwei, Deputy Director of the Institute of Public Policy and Governance at Shanghai University of Finance and Economics, informed Yicai that this new policy effectively reduces the VAT burden on eligible companies by approximately 20 percent.

In recent months, China’s tax authorities have expanded and extended a range of preferential tax policies for both corporations and individuals, aiming to alleviate the tax load and boost economic growth. These measures include elevating the standards for special additional deductions in Individual Income Tax (IIT), extending IIT benefits for foreigners until 2027, broadening the pre-tax super deduction for R&D expenses, and granting VAT exemptions for small-scale taxpayers.

Q Which enterprises qualify for the extra China VAT deduction? 
A This new policy is applicable to companies certified as high and new technology enterprises (including their non-legal entity branch companies), engaged in manufacturing, and registered as general taxpayers (entities with annual taxable sales exceeding RMB 5 million).
The announcement specifies that the list of advanced manufacturing companies will be determined by provincial, regional, or municipal industrial and information technology departments.

Q How is the supplementary deduction computed? 
A In China, companies can deduct certain types of input VAT from output VAT, such as the VAT amount indicated on special VAT invoices from suppliers, customs import VAT receipts from the customs office, and others.
Under the new policy, qualifying firms can calculate the additional deduction as 5 percent of the deductible input VAT for the current period. Input VAT that cannot be deducted following existing regulations is excluded from this calculation. Any previously calculated additional deduction for input VAT that is transferred must be reduced accordingly in the transfer period.

After calculating the VAT payable before deductions, companies can apply the additional deduction as follows:

If the pre-deduction payable VAT is zero, the entire additional deductible VAT for the current period can be carried forward to the next period.

If the pre-deduction payable VAT is greater than zero and exceeds the additional deductible VAT for the current period, the entire additional deductible VAT for the current period can be deducted from the pre-deduction payable VAT.

If the pre-deduction payable VAT is greater than zero but less than or equal to the current period’s additional deductible VAT, the current period’s additional deductible VAT is used to reduce the pre-deduction payable VAT to zero. Any remaining additional deductible VAT for the current period can be carried forward and deducted in the subsequent period.

Companies can calculate and record any eligible but unrecorded additional deductible VAT in the same period when the applicable additional deduction policy is determined.

Please note that the additional VAT deduction policy does not apply to the export of goods and labor services or cross-border taxable activities conducted by a taxpayer. For companies engaged in both the export of goods and services and cross-border taxable activities, and where input VAT cannot be segregated for additional deduction, the following formula should be used to compute the input VAT ineligible for additional deduction:

Input VAT not eligible for additional deduction = Total input VAT that cannot be separated for the current period × Sales revenue from export of goods and services and cross-border taxable activities for the current period ÷ Total sales revenue for the current period

Q Is it possible to combine this policy with other additional VAT deduction policies? 
A No, companies eligible for multiple additional VAT deduction policies may choose to apply the most favorable one, but multiple policies cannot be applied simultaneously during the same period.

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