Refund of uncredited period-end VAT

On 30 April 2019, the State Taxation Administration released an announcement ([2019] No.20) on Matters Relating to Handling the Refund of Uncredited Period-end Value-added Tax. The changes announced came into force as of 1 May 2019.

Previously, uncredited period-end VAT was not refundable. Instead, it was recorded in the taxpayer’s account for VAT deduction in subsequent months. The previous regulation was not practical for start-up entities or industries in seasonal business that may have relatively low turnover but higher cost in certain periods. Under the changes, the cash-flow of these entities will be improved.

Key changes

The announced changes clarify the following:

The question of who can apply for the refund of incremental uncredited tax from the tax authority. The following taxpayers can apply:
- Taxpayers whose incremental uncredited tax after April 2019 is great than zero for six consecutive months (in the case of taxpayers who pay tax quarterly, for two consecutive quarters), and whose incremental uncredited tax in the sixth month is not less than CNY500,000;
- Taxpayers who the Chinese tax authority grades as having a tax credit rating in Class A or B;
- Taxpayers who have not been charged by the tax authorities with claiming false refunds of uncredited tax or tax rebates for exports or have not been found to have issued special VAT invoices for non-existent transactions, at any time during 36 months prior to their application for VAT refund;
- Taxpayers who have not been punished by the tax authority two or more times within the 36 months before making their application for a VAT refund; and
- Taxpayers who, as of 1 April 2019, did not benefit from the Refund and Rebate.

How to calculate the incremental uncredited tax refund

Refundable incremental uncredited tax is equal to the incremental uncredited tax times the proportion of input tax times 60%.

When and how to apply for the refund of uncredited tax

Taxpayers can apply for the refund the first month after they qualify for the refund of uncredited tax. Applications must be made after submission of VAT returns, but within that VAT filing period. Refund applications must be submitted through the e-tax system or in person at the tax bureau.

Impact of the changes

Taxpayers should be careful because, in the process of applying for the refund, the tax authorities will review and confirm whether the taxpayer meets the conditions for the tax refund and they will determine the amount of the refundable tax credit for the current period.

Tax refund applications might be suspended or terminated if the taxpayer is involved in any VAT-related risks or if the tax authorities suspect fraud, or if the taxpayer is involved in a tax inspection case that has not been settled.

If a taxpayer obtains a tax refund on the basis of a false VAT calculation base, a false tax declaration, or other deceptive methods, this will be considered tax evasion. In such a case, the tax authorities will recover the defrauded tax refunds in accordance with relevant provisions of the Law of the People's Republic of China on Tax Collection and Administration.

Our recommendation

Though there are more and more tax incentives now available in China, the tax compliance requirements in China are becoming stricter and stricter. In the process of reviewing applications for tax incentives, tax authorities may discover issues/problems. To minimize risks, management should pay more attention to internal controls.

We would be pleased to assist with all relevant changes/problems arising from this tax reform in China. Please do not hesitate to contact us.

Gordon Gao
gordon.g@bdo.com.cn

Janet Liu
janet.liu@bdo.com.cn