As mentioned above, the export of taxable services are zero-rated or VAT exempt. Both zero-rated and VAT exempt services are exempt from output VAT. The difference between zero-rated and exempted VAT is that, under zero-rated VAT, the input VAT attributable to the export of services can be credited from VAT payable and/or refunded. Under the exemption system, the input VAT attributable to export of services cannot be credited or refunded.

Circular 37 clarifies that if a pilot service is eligible for both VAT zero-rating and VAT exemption, VAT zero-rating takes precedence over VAT exemption. Providers of zero-rated VAT services may opt to pay VAT or apply for VAT exemption instead by filing a relevant declaration. However, taxpayers will be prevented from electing VAT zero-rating in the subsequent 36 months. Since the procedures for obtaining a tax refund for zero-rated VAT services is quite complex, some taxpayers who have little input VAT deductible may opt for VAT exemption.

Zero-rated VAT
For zero-rated VAT services, the “exemption, credit and refund” method applies to the provision of zero-rated services by taxpayers who adopt the general calculation method; while the “exemption and refund” method applies to foreign trade enterprises that provide both zero-rated and other services. These methods are defined as follows:

• Exemption, credit and refund method – VAT is exempted, and the corresponding amount of input VAT is used to offset the amount of VAT payable. Any surplus is refunded.
• Exemption and refund method – VAT is exempted, and the corresponding input VAT on purchased taxable services is refunded.

No special VAT invoice can be issued for zero-rated services. Providers of zero-rated taxable services should submit the following materials in order to qualify for the treatment:

• Application form for recognition of export tax refund (exemption) eligibility and electronic data generated by the export tax refund (exemption) reporting system;
• For international transportation services, the relevant business licenses and permits;
• For lessees leasing transportation tools via voyage charter, time charter and wet lease to provide international transportation services, the relevant contract or agreement;
• For R&D and design services, the Technology Export Contract Registration Certificate;
• For zero-rated VAT services providers who also engage in export of goods but have not undergone export tax refund (exemption) – certification qualification, the Foreign Trade Operator Filing Registration Form and the PRC Customs Goods Import and Export Consignor Consignee Customs Registration Certificate.

Following the recognition of the sales revenue from the provision of zero-rated VAT services, the service providers should file VAT returns and apply for refunds with the competent tax authority within the VAT filing period in the subsequent month (or quarter). They should collect all relevant certificates and apply for a refund between the subsequent month (or quarter) following revenue recognition and April 30 of the following year, or they will no longer be entitled to obtain the refund (exemption).

Among other materials, international transportation service providers should provide original copies of the cargo or passenger manifest or other vouchers reflecting the service revenue; while R&D and design service providers should provide the relevant Technology Export Contract Registration Certificate and R&D or design agreement signed with the overseas entity.

VAT exemption
To obtain exemption for exported services, a written cross-border service contract must be signed with the service recipient. In addition, the entire income from providing the service must be obtained from overseas. This could pose problems for intercompany arrangements – if a local branch or company pays, then no exemption can be applied. Taxpayers providing VAT exempt exported services should conduct separate accounting for the sales volume of the exported services and accurately calculate non-deductible input VAT. No special VAT invoice should be issued for VAT-exempt income.

To apply for exemption, taxpayers should conduct filing with the competent tax authority and submit materials including the service agreement (translated into Chinese if in a foreign language), proof that the service took place overseas, that the service recipient is located overseas, or that the transport involves foreign destinations.

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