China's New VAT Law

On December 25, 2024, the National People's Congress of China passed the Value-Added Tax (VAT) Law, which will come into effect on January 1, 2026.

The newly enacted VAT Law largely retains the existing tax framework, including the three-tier tax rate structure: 13 per cent for general goods sales and imports, 9 per cent for certain services like transportation, telecommunications, and publishing, and 6 per cent for modern services. It also maintains the simplified 3 per cent calculation method for specific situations and includes special arrangements for sectors such as offshore oil and gas extraction projects.

Notably, the VAT Law introduces a clearer legal framework. It defines the scope of VAT, the application of tax rates, and tax incentives with greater specificity. Article 3 outlines that entities and individuals selling goods, services, intangible assets, or real estate, or importing goods, are VAT taxpayers. This clarity helps eliminate ambiguities and aligns VAT administration with international standards.

In terms of cross-border transactions, the VAT Law adopts the "place-of-consumption" principle, ensuring that the tax jurisdiction corresponds to where a transaction occurs. Article 4 provides a framework for determining domestic taxable transactions, specifying criteria based on the location of goods, real estate, or services, and the status of the seller. This alignment with international VAT principles improves tax fairness and reduces complexity in global trade.

Significant adjustments have also been made to input tax deduction rules. The VAT Law removes previous restrictions, such as the ban on deducting "purchased loan services," and adds new limitations on purchases for collective welfare or personal consumption. In addition, a more comprehensive Excess Input VAT Credit Refund system is now available, allowing businesses to either carry forward or request refunds of excess VAT credits, enhancing cash flow management.

The VAT Law also provides clearer distinctions between mixed and composite sales, simplifying VAT determination for transactions involving multiple tax rates. Additionally, the Law refines the rules surrounding deemed taxable transactions, limiting them to situations like goods used for personal consumption or transfers without consideration.