TAX ALERT | Refund of Three Authorized Tax Collection Commissions (Ⅱ)russonxiao
Previously, we have already made an elaboration on the definition of three authorized tax collection commissions, the management method, the allocation rate and the maximum limit. In this article, we will go through whether this government refund is subject to VAT, whether there are risks associated, etc.
- Tax perspective
Generally speaking, the income of an enterprise should be subject to VAT regardless of whether the enterprise is a general taxpayer or a small-scale taxpayer, and the difference between general taxpayers and small-scale taxpayers is only the applicable tax rate (except for social organizations and other welfare institutions which enjoy tax exemption).
That is to say, the three authorized tax collection commissions of government subsidies should be treated as income of the enterprise and subject to VAT. Although, some financiers may mistakenly believe that since the refund is a government grant, it should be exempt from VAT.
According to Article 15 of the «Interim Regulation of the People’s Republic of China on Value Added Tax», there are seven categories of VAT exemptions, such as agricultural products, scientific research equipment, special items for the disabled, etc. Except as provided in the preceding paragraph, VAT exemptions and deductions are regulated by the State Council. No region or department shall provide tax exemptions or deductions.
According to «Announcement No. 11  of the State Administration of Taxation – Announcement on Issuing the Measures for the Administration of Tax Refund (Exemption) for Taxable Services Subject to Zero Value-Added Tax Rate», those eligible for zero VAT rate are usually: international transportation by air, international passenger transportation by rail, and cross-border business activities such as the provision of R&D services/design services to foreign entities, etc.
From these documents, it is not stated that the financial assistance income can be counted as VAT-exempt income or can be subject to zero VAT rate, nor is there any article related to the refund of the three authorized tax collection commissions. This is proving that this refund of the three authorized tax collection commissions is subject to VAT.
- Risk associated with non-compliant contributions
An enterprise will face tax risks when it fails to declare and pay VAT arising from the collection of three authorized tax collection commissions as required.
According to the Article 62 of the «Tax Collection Administration Law of the People’s Republic of China», where a taxpayer fails to go through the formalities for tax declaration and submit information on tax payment or a withholding agent fails to submit to the tax authorities statements on taxes withheld and remitted or collected and remitted and other relevant information within the prescribed time limit, he shall be ordered by the tax authorities to rectify within a time limit and may be fined not more than 2,000 yuan; if the circumstances are serious, he may be fined not less than 2,000 yuan but not more than 10,000 yuan.
In practice, if an overdue happens, despite the fine/penalty, an additional late payment fee is required, which is usually five ten thousandths (0.005%) of a percent of the daily tax portion.
In addition, if the penalized enterprise is a general VAT payer, its qualification of input tax credit and the right to receive and use special invoices will be cancelled for a certain period of time, and its VAT payable will be treated as sales.
In case of unpaid taxes, the credit rating of the enterprise will also be downgraded. With the State Administration Commerce Bureau fully opening the function of the National Enterprise Credit Information Public System, the basic information of relevant enterprises can be publicly inquired about on the Internet. Business partners who inquire about the lower credit rating of an enterprise may face the possibility of not being able to continue business cooperation. Worse still, if the credit rating is reduced to D, the enterprise will not be able to use the online platform for VAT invoice certification and deduction as well as export tax refund application, which will seriously affect the cash flow of the enterprise.
- Application deadline
The three authorized tax collection commissions are included in the budget management, unified arranged by the public finance through the budget expenditure, and are liquidated on an annual basis according to the facts.
The withholding and collection agents and collectors shall submit the relevant information to the taxation authorities before March 30 of each year (natural year) for the application of the three authorized tax collection commissions for the previous year. If the application is not submitted in time, it is deemed to be automatically abandoned.
Our article paused here due to space limitations. As there are different types of VAT returns, it is impossible to explain how to fill in and declare in the VAT return and withhold the tax. In addition, the impact of the three authorized tax collection commissions on corporate income tax is not the main point here, so we will discuss it separately.
If you have any other questions or points you do not understand, or if you have other situations in conjunction with your own business, please feel free to contact us.
«Interim Regulation of the People’s Republic of China on Value Added Tax»
«Tax Collection Administration Law of the People’s Republic of China»