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. This landmark legislation introduces several refinements to China's VAT system, maintaining the current three-tier tax rate structure while incorporating important improvements aligned with international VAT practices. While the law itself is now established, the development of detailed implementation rules and supporting regulations will play a crucial role in its practical application. Businesses are advised to closely monitor these developments and proactively review their VAT processes in preparation for the law's full implementation.
China's VAT system, introduced in 1994 with provisional regulations, has evolved through significant reforms over the past three decades. The VAT system transitioned to a consumption-based model in 2009 and expanded in scope with pilot reforms in service sectors starting in 2012, achieving full implementation in 2016. The system has been further refined with simplified tax rates and regulatory adjustments in subsequent years. VAT now constitutes the largest share of tax revenue in China, contributing approximately 38 per cent in 2023.
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.
The definition of taxable sales revenue has been refined to include both monetary and non-monetary economic benefits, including market prices for non-monetary transactions. This brings China’s VAT system closer to international norms, ensuring more consistent and transparent tax reporting. Further, the Law extends anti-tax avoidance measures, empowering tax authorities to scrutinize transactions with unusually high or low sales amounts.
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.
The VAT Law further defines out-of-scope income, including wages, administrative fees, and interest income, clarifying what is not subject to VAT. It also removes certain exemptions, which should help businesses better understand their VAT obligations.
While the PRC VAT Law establishes a comprehensive framework, businesses must await further detailed regulations for its implementation. These regulations will provide guidance on transitional phases and operational decisions. As the effective date of January 1, 2026, approaches, businesses are urged to stay informed about the evolving regulatory landscape and begin reviewing their VAT processes in preparation for the changes ahead.