Confusion reigns in China as the transport and logistics industry tries to come to terms with a new value-added tax of 6 percent introduced on Aug. 1.
The new charge is part of a shift by China’s tax authorities away from taxation based on business turnover to the use of VAT across a number of industries and services, including transport.
But although it is clear that a VAT of 6 percent is payable on all transport and logistics services conducted or billed within China, there remains widespread bewilderment about how this should be applied to complex international supply chains.
Paul Tsui, chairman of the Hong Kong Association of Freight Forwarding and Logistics, said the new tax was causing problems across modes. “Shippers are not familiar with the latest VAT implementation and structure, which is creating misunderstandings in passing VAT along the supply chain,” he said.
Most container shipping lines and many NVOCCs are already adding 6 percent VAT rates onto customer bills, but it is still far from clear whether international shipping services are even liable for VAT and, if they are, how the payments received by transport service providers are being relayed to the Chinese government, a point keenly made by the Hong Kong Shippers’ Council.
Lines have been reluctant to explain how their individual policies have been formulated, presumably while they await more detailed clarifications from Beijing. But sources suggest some carriers are concerned that even if international shipping services — a definition understood to include transport from Mainland China to Hong Kong, Macau and Taiwan — are excluded from the new regime, they could still be liable for VAT because most invoice shippers located in the Mainland from offices within China.
A July circular from APL, for example, said the line would levy an additional 6 percent VAT on top of freight and charges “currently payable in China in VAT invoices issued by us with effect from 1 August 2013” but added that VAT “does not apply to freight and charges collected outside of China.”
Some commentators believe that in place of legal certainty, lines and forwarders are passing on VAT charges to shippers to protect bottom lines even before they know whether the services rendered are liable for taxation. Others have suggested that smart shippers will start paying for liner services at offices located outside China.
Rahul Kapoor, senior manager for equity research at Drewry, said uncertainty over the new VAT system was partly responsible for the surge of ocean liner bookings prior to August 1, as shippers sought to avoid the higher general rate increases and VAT charges implemented by lines. “This certainly came as a windfall for carriers and at an opportune time when they were aiming for a much needed GRI successes,” he said.
Under the new regime it is also unclear whether forwarders can bill services as “VAT inclusive” and, if not, how VAT should be billed to clients outside China for services conducted, at least in part, within the country.
Another problem is also apparent in the air freight sector. Airlines uplifting freight exports have not been including VAT on invoices but instead issuing standard debit notes. According to Tsui, this is creating an issue for forwarders, which must, to comply with the new rules, include VAT on the invoice they issue to shippers for the air freight service used and then pay this amount back to the Chinese tax authorities.
“The latest VAT implementation rules also only allow freight agents to make use of Chinese VAT invoices as the deductible cost element in reporting to the Tax Bureau,” he said. ”However, this increases the burden on the local freight agents, as overseas invoices are no longer valid for tax reduction.”
“In addition, if the shipment involves overseas invoicing, such as when importing into China, the Tax Bureau does not recognize the overseas invoice and so this cannot be deducted from the tax payable by the ultimate customer in China,” he said.
The latter point has also been raised by shippers exporting cargo to China from North America and Europe. Various reports suggest that lines and forwarders are charging customers surcharges to cover VAT payments.
The National Industrial Transportation League has asked U.S. authorities to clarify how VAT is applicable to international movements, while U.K. tax authorities have admitted they are unsure whether Chinese VAT should be included in U.K. customs declarations and duty and VAT therefore paid on it.
The British International Freight Association reports that U.K. tax authorities admit the situation regarding China’s new VAT system is “fluid and complex”, but that the overriding view is that “Chinese VAT should be regarded as an internal tax incurred in the country of exportation.”
Under EU law, any internal tax payable in the country of exportation can be left out of the customs value if that is not passed onto the buyer. “However,” said a note from BIFA, “if the U.K. buyer has to pay the tax it will be considered as part of the cost in obtaining the goods and must be included for customs purposes in the customs declaration and duty and VAT paid at time of importation into the UK”.
Tsui said HAFFA was attempting to speak to officers from the Tax Bureau in Beijing to resolve many of these issues but, in the meantime, exporters to China should follow some basic rules: “Any payment to be executed in China is subject to VAT, which means any import shipment where payment needs settling in China is subject to VAT. However, the VAT can be passed along the supply chain in China through to the end user.”
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