China Halts Purchase VAT Rebates for Foreign Companies

The Ministry of Finance announced at its website on Dec. 29 the detailed regulations on removal of value-added tax rebates for foreign companies' purchase of made-in-China equipment. The new rule will be effective as of Jan. 1, 2009. Exemption of imported equipment from VAT is also scrapped.

The new policy is a part of China's VAT reform which allows enterprises to have their VAT on equipment purchase deducted from their VAT on sales. It is estimated that the reform will ease the tax burden of companies by more than 120 billion yuan (17.59 billion U.S. dollars) a year. The reform is designed to shift the existing production-based VAT regime to a consumption-based one and alleviate the impact of the global financial crisis on China's economy.

However, VAT rebates will remain effective for a half-year transitional period. It is provided that foreign enterprises can still enjoy tax rebates for their made-in-China equipment purchase which is made on and prior to June 30, 2009 on the condition that the purchase is in compliance with the terms stated by the new policy.

In addition, VAT deduction from sales is not applied to foreign companies' equipment purchase which has been granted VAT tax rebates.

It is also provided that tax rebates on equipment purchase by foreign companies are under a five-year supervision by tax regulatory bodies. Certain changes on the company or the equipment in issue within the five years can result to reimbursement of the tax rebates.

New regulations on consumption taxes and business operation taxes are also effective as of Jan.1, 2009.