For the hot topic this time, FAQ for Practical Issues Concerning the 2016 VAT Reform, LexisNexis China has invited several experts from Shanghai Fortran Law Firm to answer practical issues concerning the replacement of business tax with VAT in certain sectors, such as the real estate and construction, the life service and the financial service sector, giving more contents to the Lexis Practical Guidance Finance and Tax.

【Question】: Will a deemed input value-added tax credit be available for the purchase of land use rights through bidding, auction or listing from local government authorities?

【Answer】: As no VAT special invoice is issued for the land use right acquired through bidding, auction or listing from the local government authorities, it is impossible to offset against the output VAT. According to Article 53 of Appendix I, the Implementing Measures for the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax, attached to the Circular of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax (Cai Shui [2016] No. 36), no special value-added tax invoice may be issued under any of the following circumstances: 2. Any taxable activity to which the provisions on value-added tax exemption apply. Besides, Appendix III, the Provisions on Transitional Policies for the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax, attached to the Circular aforesaid stipulates that the circumstance (37) where land owners assign land use rights or land users return land use rights to land owners is exempted from value-added tax. The land use rights granted by government authorities shall be deemed as the circumstance exempted from value-add tax and thus shall be issued no special VAT invoice according to law, which results in the impossibility to offset the input VAT with VAT special invoice. Based on the regulations above, Paragraph 1 of Sub-item 10 of Item 3 of Article 1 in Appendix II, the Provisions on Matters relating to the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax), attached to Cai Shui [2016] No. 36 stipulates that for the general taxpayers of real estate developers who sell the real estate projects (excluding the old real estate projects to which the simple tax calculation method is applicable) developed by them, the sales amount shall be the balance of the total price and other charges gained after deduction of the land price paid to the government departments at the time of acceptance of the transferred land. Therefore, if general VAT taxpayers are subject to the general tax calculation method, the land price shall be deduced from the sale revenue to resolve the problem that the input VAT cannot be offset.

【Answered By】: Lawyer Zhou Fengfang from Shanghai Fortran Law Firm

【Question】: Will real estate developers be eligible to claim an input value-added tax credit for their funding costs?

【Answer】: Real estate developers shall not claim an input value-added tax credit for their funding costs. According to Paragraph 1 of Article 27 of Appendix I, the Implementing Measures for the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax, attached to the Circular of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax (Cai Shui [2016] No. 36), the input tax on the following items may not be offset against the output tax: 6. passenger transportation, loan, catering, daily resident Services and entertainment services purchased. Besides, the Paragraph 3 of Item 4 of Article 1 of Appendix II, the Provisions on Matters relating to the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax, attached to Cai Shui [2016] No. 36 stipulates that for the consultant's fees for investment and financing, handling charges, consulting fees and other expenses that are paid by taxpayers to lenders for receiving loan services and that are directly related to the loans, the input tax shall not be offset against the output tax. Thus, for the funding costs of real estate developers, including the interest paid for loans and the consultant's fees for investment and financing, handling charges, consulting fees and other expenses that are directly related to the loans, the input VAT tax thereof shall not be credited against the output VAT. Also, according to the Paragraph 1 on loan services of Item 5 of Article 1 of Appendix I, the Explanatory Notes on Sales of Services, Intangible Assets and Real Property, attached to Cai Shui [2016] No. 36, the income obtained from occupation of or inter-bank lending of funds shall be deemed as loan services.

【Answered By】: Lawyer Zhou Fengfang from Shanghai Fortran Law Firm

【Question】: Will interest paid for interbank lending transactions be exempt from value-added tax?

【Answer】: The interest paid for interbank lending transactions shall be exempt from value-added tax if meeting certain conditions. According to Item 23 of Article 1 in Appendix III, Provisions on Transitional Policies for the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax, attached to the Circular of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax (Cai Shui [2016] No. 36), the interest income from inter-bank financial transactions is exempted from VAT. And sub-item 3 thereof clarifies that fund transactions between financial institutions refer to unsecured short-term (one year or less) financing activities carried out upon approval of the People's Bank of China between financial institutions on the national inter-bank lending market via the national unified inter-bank lending network. In other words, where the inter-bank lending meets the following conditions, the interest paid for such inter-bank lending shall be exempted from VAT: 1. Entering the National Inter-bank Lending Market with the approval of the People's Bank of China; 2. Lending through the national unified inter-bank lending network; 3. Short-term (one year or less) financing activities; 4. Nothing secured for such financing activities.

【Answered By】: Lawyer Yang Chunyan from Shanghai Fortran Law Firm

【Question】: Will interest on loans paid by general value-added tax taxpayers be ineligible for input VALUE-ADDED TAX credits?

【Answer】: As the financial sector is included into the scope of value-added tax in lieu of business tax from May 1, 2016, the Paragraph 1 of Article 27 in Appendix I, the Implementing Measures for the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax, attached to the Circular of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax (Cai Shui [2016] No. 36) stipulates that “the input tax on the following items may not be offset against the output tax: 6. Passenger transportation, loan, catering, daily resident services and entertainment services purchased”. Besides, according to Sub-item 1 on loan services of Item 5 of Article 1 in Annex (Explanatory Notes on Sales of Services, Intangible Assets and Real Property) attached to the fore-mentioned Appendix I, the income obtained from occupation of or inter-bank lending of funds, including the interest income during the period of holding financial instruments, interest income from credit card overdrafts, from buying of the resale of financial instruments and from margin financing and securities lending, and interest and income as interest obtained from financing sale-leaseback, documentary bills, default interest, discounting of bills, enlending and other business, shall be all deemed as the loan services. And interests born by the general VAT taxpayers shall not be eligible for input VAT credits. Before May 1, 2016 when the financial sector has not been included into the scope of VAT tax in lieu of business tax, loan service is subject to the business tax at the tax rate of 5% that is included in the price for loan service and the business tax invoice cannot be used for the input VAT credits. After the comprehensive implementation of VAT in lieu of business tax, loan service is subject to VAT at the rate of 6% that is not included in the price for loan service. For the general VAT taxpayers, as the tax burden for the payment of interests increases slightly, the overall tax burden doesn’t change significantly compared with that assumed before even though the interest paid is ineligible for input VAT credits. By contrast, if such interest is eligible for input VAT credits, the overall tax burden will vary significantly compared with that before the pilot program. Also, the financing sector often imposes a significant impact on the fiscal revenue. For these reasons, interest paid shall be ineligible for input VAT credits against the background that it is subject to a VAT tax rate of 6%.

【Answered By】: Lawyer Yangwei from Shanghai Fortran Law Firm