Background
On December 25th, 2024, the Standing Committee of the 14th National People’s Congress of China voted to enact the Value-Added Tax Law of the People’s Republic of China (“VAT Law”), which will take effect on January 1st, 2026. With this landmark development, 14 of China’s 18 types of tax now rest on codified laws. By largely retaining existing VAT policies, the VAT Law achieves a delicate balance between maintaining continuity and paving the way for a refined and robust tax framework.
In this newsletter, we will focus on the VAT Law’s notable reforms, analyze key changes and evaluate their potential implications for taxpayers and cross-border transactions.
Key changes from the VAT Law
1. Refinement of the definition of “domestic taxable transactions”
The concept of “domestic taxable transactions” introduced by the VAT Law is a combination of the concept of domestic sales and domestic taxable activities under the current VAT regulations. However, the following changes exist:
2. Narrow-down of the scope of “deemed taxable transactions”
The VAT Law imposes clearer boundaries on the scope of “deemed taxable transactions”, which is mentioned with the term “deemed sales” under the current regulations, so that the discretion from the taxation authorities will be limited.
3. Listing of non-taxable transactions
The VAT Law, compared with the current regulations, provides a different list of non-taxable transactions.
4. Streamlining of the applicable scope of simplified taxation method and the applicable VAT levy rates
The VAT Law, compared with the current regulations, has streamlined the scope of transactions to which the simplified taxation method applies and the applicable VAT levy rate under the simplified taxation method.
5. Potential changes in determination of taxable sales amount
The VAT Law is not clear whether the “net proceeds” of certain transactions can continue to be the taxable sales amount. In addition, the basis for determining the taxable sales amount of deemed taxable transactions may also change.
6. Update of the scope of non-creditable input VAT
The VAT Law has updated the scope of non-creditable input VAT by removing the input VAT arising from loan services and adding the restrictive conditions to non-creditable input VAT arising from catering services, life services and entertainment services.
7. Follow-up attention required to the preferential VAT policies
The VAT Law has set out the statutory VAT exemption policies, but whether and how the other preferential VAT policies stipulated by the current regulations will continue to be valid is not clear yet.
Conclusion and suggestion
The enactment of the VAT Law represents a significant step forward in China’s tax-related legislative process and, in the meantime, refines the VAT system which aims at enhancing fairness, efficiency, transparency and compliance in VAT administration. Although there is still a year’s time for preparation before the VAT Law comes into effect, understanding the changes brought by the VAT Law and aligning the companies’ operation with the evolving tax framework will be crucial. Companies must stay ahead of regulatory shifts, especially as the digitalization of tax management accelerates, and keep a close eye on the follow-up implementation rules of the VAT Law as well as the auxiliary regulations that may further clarify the unclear issues in the VAT Law.
Social Media cookies collect information about you sharing information from our website via social media tools, or analytics to understand your browsing between social media tools or our Social Media campaigns and our own websites. We do this to optimise the mix of channels to provide you with our content. Details concerning the tools in use are in our Privacy Notice.