Urgent Circular of the State Administration of Taxation on Issues Concerning the Strengthening of the Administration of Value-Added Tax Imposed on Newly Established Trading Enterprises

Urgent Circular of the State Administration of Taxation on Issues Concerning the Strengthening of the Administration of Value-Added Tax Imposed on Newly Established Trading Enterprises

Guo Shui Fa Ming Dian [2004] No.37

July 1, 2004

To the state taxation bureaus of the various provinces, autonomous regions, municipalities directly under the Central Government and cities specifically designated in the state plan:

Through an analysis of recent VAT-related offences discovered and handled by the taxation authorities, we have found that most criminals circumvent state taxes by purchasing special VAT invoices (hereinafter referred to as "special invoices") in the name of a sham registered trading enterprise, and then make off with the proceeds after illegally issuing such invoices. Such criminal activity has seriously disturbed the social and economic order of the country, resulting in very large shortfalls in state tax revenue. Meanwhile, our analysis has also revealed that loopholes exist in the recognition and administration of VAT ordinary taxpayers (hereinafter referred to as "ordinary taxpayers") by the taxation authorities. In order to combat criminal activities such as the issuance of false invoices and the claiming of fraudulent tax deductions, the State Administration of Taxation has decided to further strengthen the rules on the recognition and administration of newly established trading enterprise ordinary taxpayers and further regulate the collection of VAT imposed on trading enterprises. We hereby notify all recipients of the relevant issues as follows:

Article 1 Classification of Newly Established Trading Enterprises as Ordinary Taxpayers
(I) For newly established small trading enterprises, the existing method of calculating VAT on the basis of expected annual sales volume shall no longer be applicable. Any such enterprise may apply for recognition as an ordinary taxpayer only if its sales volume reaches RMB 1,800,000 within one year of tax registration.
1. Before being recognized as an ordinary taxpayer, a newly established small trading enterprise shall be treated as a small taxpayer.
2. Once the annual sales volume of an applicant enterprise reaches RMB 1,800,000 within one year of tax registration, the relevant taxation authority shall review its application materials, assess its business performance, check its tax declaration details, and recognize it as an ordinary taxpayer after confirming that such materials and details do not present any issues. The taxation authority shall provide guidance on the payment of tax during the guidance period (hereinafter referred to as the "guidance period for the administration of ordinary taxpayers").
3. At the end of the guidance period, subject to examination and approval by the relevant taxation authority, an applicant may be formally recognized as an ordinary taxpayer, and shall be treated as such.
(II) Newly established retail enterprises that sell goods in kind but have no fixed place of business and newly established medium-sized or large trading enterprises with registered capital of no less than RMB 5 million and no less than 50 employees that apply for recognition as ordinary taxpayers in the course of completing tax registration procedures may be recognized as ordinary taxpayers, proceed directly to the guidance period, and be treated as ordinary taxpayers during the guidance period.
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