SHANGHAI — Forwarders in China still can’t deduct freight payments of a value-added tax, even though Chinese officials provided additional guidelines earlier this year.
China’s Ministry of Finance tried to clarify its new VAT on logistics services to allow second-tier forwarders, not just those who sign contracts directly with the carriers, to deduct payments of the tax imposed Aug. 1. Forwarders able to deduct the 6 percent VAT from their taxable income include those that provide relevant services, such as the securing of “shipping space, business liaison, box management and bill settling for international transportation,” the ministry said. The clarification was made in December 2013 through Circular 106, attachment 2.
“The notification was announced by the Ministry of Finance in January 2014, then one or two weeks later, forwarders found that tax bureaus in China can’t implement the notification,” said Robert Li, tax partner of PwC China and the lead partner of Indirect Tax practice and TMT industry of Central China, at the Breakbulk Executive Presentation in Shanghai on March 12.
Li said he believes there are two reasons why forwarders cannot implement the notification: “Firstly, the policy was introduced by the Ministry of Finance, not the Tax Bureau,” he said. “Secondly, it was in the form of a notification, not in an official document.”
Li Linhai, head of the Shanghai International Freight Forwarders Association, confirmed the situation and commented: “We are still communicating with the government regarding the VAT issue. However, we understand that China’s reforms on tax are systematic, so there won’t be any changes very soon.”
The notification was released when Circular 106, the policy that received complaints in the logistics industry, was launched on Jan. 1, 2014, after a more controversial clause, Circular 37, was removed.
Circular 106 stated that VAT net basis treatment was applicable for freight payments directly to carriers for international transportation services. However, forwarding companies with co-loaders, non-vessel-operating common carriers or shipping agents are still not able to tap the VAT deduction.
Through the Circular 37, issued by China’s State Council late last year, foreign shipping companies would join their Chinese counterparts in being able to deduct the VAT from their taxable income. The lack of clarity regarding the 6 percent VAT on logistics services has raised concerns that misguided or bad actors are taking advantage of shippers since the tax was launched.
The VAT, which allows Chinese manufacturers to claim value-added credits on their taxes, represents an improvement from the 5 percent business tax, which is part of China’s efforts to shift its export-driven economy toward services.
“Many shippers have shifted their payment venues, from mainland China to abroad, with an aim to avoid the extra payment on their cost, which caused a shrinkage of VAT revenue for Chinese tax bureaus,” Robert Li said. “One of our customers has shifted 30 to 40 percent of their revenue abroad.”
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