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There has been yet another tax update in China, not as major as the upcoming Individual Income Tax reform due to come into force in January 2022, but still relevant for businesses to be aware of.
According to the Announcement of the State Taxation Administration (“SAT”) on Matters concerning the Collection and Administration of Urban Maintenance and Construction Tax (Announcement of SAT [2021] No.26), which came into effect on September 1st, 2021, no urban maintenance and construction tax shall be levied on the amount of VAT or consumption tax paid for imported goods or for labor services, or services and intangible assets sold by overseas entities or individuals to China.
Furthermore, according to the Announcement on the Determination of the Tax Base of Urban Maintenance and Construction Tax and Other Matters (Announcement of SAT [2021] No.28), the tax base of education surcharges and local education surcharges are the same as that of urban maintenance and construction tax.
Essentially this means that urban maintenance and construction tax, education surcharges and local education surcharges on the said payment are no longer to be levied from September 1st, 2021 onwards.
Thus, the tax base for urban maintenance and construction tax, education surcharges and local education surcharges is equal to VAT + consumption tax (excluding the payment of VAT and/or consumption tax for the import of goods or sale of labor services, or services, and intangible assets by overseas entities and individuals) + VAT exemption and credits － directly exempted or reduced VAT or consumption tax – refunds of VAT credits.
On a related note, according to the appendix of Caishui 2016 No.36, sales of services is a broad concept, referring to the provision of transportation services, postal services, telecommunications services, construction services, financial services, modern services and life services. For instance, financial services include loan services, while modern services also include rental services, forensic consulting services, etc.
As such, said policy applies to common outbound payments such as payment of interests, rental fees, royalties, general service fees, etc.
To sum up and further clarify, if the VAT obligations of an outbound payment contract arose before September 1st, 2021, urban maintenance and construction tax, education surcharges and local education surcharges may still need to be withheld even though the actual payment may take place after September 1st, 2021 and for any business activity stipulated after this date, the new laws shall be applied.
If you would like to know more about the most recent tax and financial policy developments in China, please contact us at info@phcadvisory.com.
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