How to succeed: China's VAT credit refund policy

Hawksford

Hawksford

Since March 2022, the Chinese government has implemented value-added tax (VAT) credit refunds on a large scale to help enterprises in specific sectors facilitate cashflow and sustain a stable macroeconomic performance.

From April to May 2022, the VAT credit refunds totalled 1.34 trillion yuan. According to the Announcement [2022] No. 21, starting from 1 July, companies in another seven sectors can now enjoy the VAT credit refund policy, including businesses active in wholesale and retail sales, agriculture, accommodation and catering. China’s VAT credit refunds are expected to rise to 1.64 trillion yuan this year and become part of the usual routine compliance for taxpayers. 

Foreign businesses operating in China under the categories of eligible companies are encouraged to apply for a full refund of incremental VAT credit on a monthly basis, and a one-off refund of their remaining VAT credit. However, when our tax specialists were called upon to assist foreign businesses applying for VAT credit refunds, they found the application process wasn’t that straightforward. This article summarises the key challenges in the VAT credit refund application process and shares our experiences in liaising with the local tax authorities.

 

Liaising with the in-charge tax officers

In most cases where refund applications involve high amounts, tax specialists need to liaise with the in-charge tax officers regarding the composition of the VAT credit and the way it cumulated throughout the tax periods. Here are some of the common scenarios we have encountered in the past few months.

 

Immediate and straightforward refund

One of the tax bureau’s top priorities this year is to promote VAT credit refunds in order to support taxpayers with any cash flow problems following the global pandemic. Once taxpayers have met the VAT credit refund requirements stipulated in Announcement [2022] No.14, the in-charge tax officer may contact them to help facilitate and speed up their applications. It is important for taxpayers to act immediately, as per the instructions of the in-charge tax officer. These types of applications are generally quite straightforward, and the VAT credit refund can be received within approximately one or two weeks.

 

Submission of a voluntary withdraw notification

When a taxpayer has applied for the VAT credit refund through the online tax system, but the application is held up under a pending status, the in-charge tax officer may contact the taxpayer to explain the situation and request them to submit a withdraw notification, stating that the taxpayer has voluntarily given up on the VAT credit refund application for the current tax period. Apart from the requirements stated in the Announcement [2022] No.14, other factors such as suspicious forms for large amounts of VAT input may cause the tax officer to hesitate or delay the refund.

We would always advise companies to comply and actively communicate with the in-charge tax officer to determine the reason behind an initial rejection and reassess the likelihood of a successful application in the next period. In the event the in-house staff are not confident about resolving the outcome, the taxpayer may wish to seek professional advice and outsource the application to tax professionals or consultants.

 

Further information request

In the process of reviewing the taxpayers’ application, the in-charge tax officer may come up with further questions about the application, typically requiring an explanation letter on the details of the VAT credit and company business within a very tight timeframe. In this case, companies should take immediate action and seek for tax professionals’ assistance in drafting the formal explanation letter to precisely target the core subjects and put the application back on track. Please note that the response period allowed is often short (one to three working days at most). If the taxpayer fails to submit the explanation letter within the response period, they may miss the refund timeline and will need to wait for the next application window after the next monthly filing.

 

Be ready for an all-around open and honest discussion about your company’s tax situation

When unsure about the application process, or when planning for some operational changes that could affect the current application – such as a change of business scope – taxpayers should take a proactive approach and discuss their plan with the tax authorities on reasonable basis. We’ve seen various cases where the tax authorities have publicly released fraudulent tax refund cases in an attempt to warn taxpayers from filing faulty applications. Therefore, engaging in open and honest communication can help facilitate the process, optimise the success rate of applications and improve one’s tax credit rating. Since 2022 is the year of VAT refunds, we expect corresponding tax inspections and increased scrutiny on taxpayers with high volumes.

 

Key considerations for VAT credit refund applications

As we have learnt from our experience in dealing with many cases, different provinces, cities and districts have their own processes and practice for reviewing VAT credit refund applications. Below, we’ve listed some key considerations to help companies plan ahead.

 

VAT input composition

Expect the tax authorities to ask for the input composition details to ensure that the majority of the VAT input composition is aligned with the taxpayer’s main businesses category. This is often an important measurement to avoid fraudulent tax refunds and provides support for taxpayers in the event of a drop in their usual revenue streams.

 

The nature of VAT input 

Services such as consultancy, technology services, decoration, and designing services would often raise the tax authorities’ attention; taxpayers with a relatively large amount of VAT input connected to the above type of services may need to provide further supporting documents explaining the necessity and authenticity of those transactions. For example, a retail company with a high composition of technology service fees as its VAT input composition could raise questions with the tax authorities due to the mismatch of its main business (i.e. retail sales of goods). 

 

An exaggerated VAT input credit 

Tax authorities may dig out the historical tax filing records to ensure that the VAT input credit has not been exaggerated in previous periods. Taxpayers are often required to provide further supporting documents and submit an explanation letter to justify the source plausibility of the VAT input credit. It is commonly seen in various sectors that sales income isn’t recognised in time, due to the industry itself, the seasonal nature of sales or other force majeure reasons such as the COVID-19 pandemic. Taxpayers shall therefore need to keep and file proof of the contracts, VAT Invoices and cashflow evidence to match documental requests in case of further investigation. 

 

The right strategy ahead 

Healthy tax compliance is the foundation for a successful refund and provides companies with a solid ground for explanations needed during the application. Taxpayers should conduct a quick self-check prior to applications to ensure their companies are eligible for the tax refund requirements and ensure the application process will not bring out any unforeseen liability. 

An open, honest communication with the in-charge tax officer is fundamental so that taxpayers can clearly understand the requirements and the key factors to achieve the refund. Lastly, seeking professional assistance can largely enhance efficiency and mitigate the potential tax risks even after an initial rejection. 

 

How can Hawksford help? 

Hawksford is an international provider of Corporate, Private Client and Fund services. With extensive experience in Asia, we provide company registration and outsourced corporate services in China, including corporate accounting and taxation solutions. 

With 100 multilingual professionals based in Shanghai, Beijing, Changshu, Guangzhou, and Shenzhen, we offer our international clients the very best local knowledge and expertise. Our dedicated and professional team will keep pace with the times and bring you the timeliest tax policies and benefits. 

Our specialised services include but are not limited to: 

  • Tax registration
  • Corporate and personal tax calculation and filing
  • Tax compliance, advisory, and implementation
  • Monthly and yearly bookkeeping and taxation services

 

References:

Ministry of Finance and the State Administration of Taxation 财政部税务总局

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