Shanghai Jerry Group Inc. - China Business Consultants

Detailed Rules and Regulations for the Implementation of the Provisional Regulations of the Peples Republic of China on Value-Added Tax

With the stipulations of Article 28 of the (hereinafter referred to as "the Regulations").

Article 2 "Goods as mentioned in Article 1 of the Regulation s to tangible moveable goods, including electricit y, heat, and gas.

"Processing" as mentioned in Article 1 of the Regu lations refers to the business of contractind to p rocess goods, where the contractor supplies the raw material and major materials and the suncontract or manufactures the goods in accordance with the requirements of the contractor and receives a processing fee.

"Repairs and replacement" as mentioned in Article 1 of the Regulations refers to the business of con tracting to carry out repairs of damaged or malfum ctioned goods, so as to restore the goods to their original conditions and functions.

Article 3 "Sales of goods" as mentioned in Article 1 of the Regulations refers to the transfer of the ownerahi p of goods for any consideration.

"Provision of processing, repairs and replacement services" as mentioned in Article 1 of the Regulat ions refers to the provision of processing , repai rs and replacement services for any consideration. However the provision of processing, repairs and replacement services by the staff employed by the units or individual business operators for their u nits or employers shall not be included.

"Consederation" as mentioned in these Detailed Rules includes money, goods or any economic benefit obtained from the purchasers.

Article 4 The following activities of units or individual op erators shall be deemed as sales of goods:

(1)Consignment of goods to other for sale;

(2)Sale of goods under consignment;

(3)Transfer of goods from one establishment to other establishments for sale by a taxpayer that maintains two or more establishments amd adopts consolidated accounting, unless the relevant establishm ents are maintained in the same county (or city );

(4)Application of self-produced or processed goods to produce non-taxable items;

(5)Provision of self-produced, processed or purcha sed goods to other units or individual operators a s investments;

(6)Distribution of self-produced, processed or pur chased goods to shareholders or investors;

(7)Use of self-produced or processed goods for collective welfare or personal or investors;

(8)Giving out self-produced, processed or purchased goods to others as free gifts.

Article 5 Asales activity that involves goods and non-taxabl e services shall be a mixed sales activiry. Mixed sales activities of enterprises, enterprise units or individual business operators engaged in produc tion, wholesaling or retailing of goods shall be r egarded as sales of goods which shall be subject to VAT. Mixed sales activities of other units or i ndividuals shall be regarded as sales of non-taxab le services which shall not be subjict to VAT.

Whether a taxpayer"s sales activity is a a mixed s ales activity shall be determined by the tax colle cting authorities under the State Administration of Taxation.

"Non-taxable services" as mentioned in the first p aragraph of this Article refers to the services su bjectn to Business Tax within the scope of the tax able items of communiations and transportation, c onstruction, finance amd insurance, posts and tel ecommunications, culture and sports, entertainmen t, and service industries.

"Enterprises, enterprise units or individual busin ess operators engaged in production, wholesaling o r retailing of goods" as mentioned in the first pa ragraph of this Article includes enterprises, ente rprise units, and individual business operators pr incipally engaged in the production, wholesaling or retailing of goods and also engaged in non-taxa ble services.

Article 6 Taxpayers also engaged in non-taxable services sha ll account separately for the sales amount of good s and taxable services and non-taxable services. W ithout separate accounting or where accurate acco unting cannot be made, the non-taxable services a nd goods and taxable services shall together be su bject to VAT.

Whether non-taxable services so engaged by the tax able shall be subject to VAT shall be determined b y the tax collecting authorities under the State A dministration of Taxation.

Article 7 "Sales of goods within the territory of the People "s Ripublie of China" (hereinafter referred to as the location of the goods sold is within the terri tory.

"Sales of taxable services in the territory" as me ntioned in Article 1 of the Regulations refers to the sales of taxable services that takes place wit hin the territory.

Article 8 "Units" as mentioned in Article 1 of the Regulatio ns refers to State-owned enterprises, collectively owned enterprises, privately-owmed enterprises, j oint-stock enterprises, other enterprises, admini strative units, institutions, military units, soci al organizations amd other units.

"Individuals" as mentioned in Article 1 of the Reg ulations refers to individual business operators a nd other individuals.

Article 9 For enterprises which lease or contract to others for management, the lessees or the sub-contractors shall be the taxpayers.

Article 10 Taxpayers selling goods or taxable services with d ifferent tax rates and also engahed in non-taxable services which shall be subject to VAT, the highe st of the tax rates on goods or taxable services s hall apply to the non taxable services.

Article 11 For taxpayers other than small-scale taxpayers (he reinafter rejerred to as "general taxpayers"), the VAT refundable to purchasers due to returns inward or discount allowed shall be deducted from the out put tax for the period in which the returns inwar d or discount allowed takes place. The VAT recover ed due to the returns outward or discount received shall be deduted from the input tax for the perio d in which the returns outward or discount receiv ed takes place.

Article 12 "Other charges" as mentioned in Article 6 of the R egulations refers to handling fees, subsidies, fu nds, fund raising fees, profits sharing, incentiv e bonus, damages on breach of contract (interest o n deferred payments ), packaging charges, rentals on packaging materials, contingency charges, puali ty charges, freight and loading and unloading char ges, commissioned receipts, commissioned payments and charges of any other nature which is in additi on to the price charged to the purchaser. The foll owing items nevertheless shall not be included:

(1)Output VAT collected from purchasers;

(2)Consumption Tax withheld on processing of consu mer goods subjict to Consumption Tax;

(3)Disbursement of freight charges that satisfies both the following conditons:

1.A fteight invoice of transportation department w as issued to the purchaser; and

2.The same invoice is turned over by the taxpayer to the purchaser.

All other charges, regardless of the accounting tr eatment under the accounting system adopted, shall be included in the sales amount in computing the t ax payable.

Article 13 Where the taxpayer is engaged in mixed sales activ ities and the non-taxable services that are subjec t to VAT in accordance with Article 5 and Article 6 of these Detailed Rules, his sales amount shall be respectively the sum the his sales amounts of g oods and non-taxable services, or the sum of the s ales amounts of goods or taxable services and the non-taxable services.

Article 14 For general taxpayers selling goods or taxable ser vices that adopt the pricing method od combining t he sales amount and the output tax, the sales amou nt shall be computed according to the following formula:

Sales amount = (Sales amount including tax) / (1 + tax rate)

Article 15 Pursuant to the stipulations of Article 6 of the Regulations, if a taxpayer sittles settles the sales amount in foreign exchange, the Renminbi conversion rate for the sales amount to be selected can be the foreign exchange rate quoted by the State (the average rate in Principle ) prevailing on the date or that on the first day of the month in which the sales take place. Taxpayers shall determine i n advance the conversion rate to be adopted. Once determined, no change is allowed within 1 year.

Article 16 For taxpayers whose prices are obviously low and without proper justification as mentioned in Article 7 of the Regulations, or have activities of sell ing goods as listed in Article 4 of these Detailed Rules but without invoiced sales amounts, the sales amount shall be determined according to the fol lowing sequence:

(1)Determined according to the average selling pri ce of the taxpayer on the same goods in the same month;

(2)Determined according to the average selling price of the taxpayer on the same goods in the recent period;

(3)Determined according to the composite assessable value. The fotmula of the composite assessable value shall be:

Composite assessable Value = Cost * (1 + cost plus margin)

For goods subject to Consumption Tax, the composite assessable value shall include Consumption Tax payable.

"Cost" in the formula refers to the actual costs o f products sold for sales of self-produced goods; and the actual costs of purchases for sales of purchased goods. The rate of cost-plus marhin in the formula shall be determined by the State Administration of Taxation.

Article 17 The "Purchase price" as mentioned in Paragraph 3, Article 8 of the Regulations includes the price pa id by taxpayers to agricultural producers for purc hasing tax-exempt agricultural products and the Ag ricultural Special Product Tax withheld accoring to the regulations.

The "price paid" as mentioned in the preceding par aguaph refers to the price specified on the purcha sing voucher approved for use by the competent tax authorities.

Article 18 For mixed sales activities and non-taxable service s which are subject to VAT according to the stipul ations of Article 5 and Article 6 of these Detaile d Rules, the input tax on goods purchased for use in the non-taxable services involved in the mixed sales activities or in the non-taxable services th at satisfies the stipulations of Article 8 of the Regulations is allowed to be credited from the out put tax.

Article 19 "Fixed assets" as mentioned in Article 10 of the R egulations refers to:

(1)Machinery, mechanical apparatus, means of trans port, and other equipment, tools and apparatus rel ated to production or business operations with a u seful life of more than one year;

(2)Article that are not the main equipment for pro duction or business operations but with a unit val ue of more than 2,000 yuan and a useful life of mo re than two yers.

Article 20 "Non-taxable items" as mentioned in Article 10 of the Regulations refers to the provision of non-tax able services, the transfer of intangible assets, the sales of immovanle properties and fixed assets under construction, etc.

The construction, re-construction, expansion, repa iring and decoration of buildings by the taxpayer regardless of the accounting treatment under the a ccounting system adopted, shall be included in the "fixed assets under construction" as mentioned in the proceeding paragraph.

Article 21 "Abnormal losses" as mentioned in Article 10 of th e Regulations refer to losses other than the norma l wear and tear in the course of production or bus iness operations. They include:

(1)Losses due to natural disasters;

(2)Losses due to theft, spoilage or deterioation, etc., resulting from improper management;

(3)Other abnormal losses.

Article 22 Where input tax has already been claimed on goods purchased or taxable services under the circumstan ces listed in Paragraphs (2) to (6) in Article 10 of the Regulations, the input tax of these goods p urchased or taxable services shall be deducted fro m the input tax of that period. If that input tax cannot be determined accurately, the input tax to be deducted shall be computed based on the actual costs of that period.

Article 23 For taxpayers engaged in tax-exempt items or non-t axable items (not including fixed assets under con struction ) and where the input tax cannot be dete rmined accurately, the non-creditable input tax sh all be computed according to the following formula :

Total Non-creditable input tax = (Sum of the sales amounts of tax-exempt items and turnover of non-taxable items of input tax of the month) / (Sum of the total sale s amount and turnove r of the month)

Article 24 The standards for small-scale taxpayers as mention ed in Article 11 of the Regulations are as follows : (1)Taxpayers engaged in the production of goods or the provision of taxable services, and taxpayers engaged principally in the production of goods or provision of taxable services but also in wholesal ing or retailing of goods , the annual sales amoun t of which subject to VAT (hereinafter referred to as "taxable sales amount ") is below 1 million yuan;

(2)Taxpayers engaged in wholesaling or retailing o f goods, the annual taxable sales amount of which is below 1.8 million yuan.

Regardless whether the annual taxable sales amount s exceed the standards for small-scale taxpayers, individuals, non-enterprise units, and enterprises which do not often have taxable activities, are c hargeable as small-scale taxpayers.

Article 25 The sales amount of small-scale taxpayers does not include the tax payable .

For small-scale taxpayers selling goods or providi ng taxable services that adopt the method of setti ng prices by combining the sales amount and the ta x payable, the sales amount is computed according to the following formula:

Sales amount = (Sales amount including tax) / (1 + Assessable rate)

Article 26 For small-scale taxpayers, the sales amount refund ed to the purchasers due to returns inward or disc ount allowed shall be deducted from the sales amou nt for the period in which the returns inward or d iscount allowed occurs.

Article 27 "Sound accounting " as stated in Article 14 of the Regulations refers to the capability of accurately accounting for the output tax, input tax and tax p ayable in accordance with the accounting regulatio ns and the requirements of the tax authorities.

Article 28 Individual operators that satisfy the conditions a s prescribed in Article 14 of the Regulations and after the approval of the bureaux directly under t he State Administration of Taxation can be confir med as general taxpayers.

Article 29 Once the small-scale taxpayers have been confirmed as general taxpayers, they cannot be reclassified as small-scale taxpayers.

Article 30 General taxpayers in any of the following circumst ances shall compute the tax payable based on the s ales amount and according to the VAT rates, but no input tax can be credited and special VAT invoice s shall not be used:

(1)The accounting system is unsound or cannot prov ide accurate tax information;

(2)The conditions of general taxpayers are satisfi ed but the taxpayer has not applied or processed t he comfirmation procedures as general taxpayers.

Article 31 The scope of part of the tax-exempt items listed i n Article 16 of the Regulations are prescribed as follows:

(1)"Agricultural" as mentioned in Item (1) of Para graph (1) refers to planting, breeding, forestry, animal husbandry and aquatic products industry.

"Agricultural producers" includes units and indivi duals engaged in agricultural production.

"Agricultural producers" refers to primary ahricul tural products. The detailed scope of thes definit ion shall be determined by the taxation bureaux di rectly under the State Administration of Taxation .

(2)"Antique books" as mentioned in Item (3) of Par agraph (1) refers to the ancient books and old bo oks purchased from the public.

(3)"Articles" as mentioned in Item (8) of Paragrap h (1) refers to goods other than yachts, motorcyc les, and motor vehicles that are subject to Consu mption Tax.

"Articles which have been used" refers to goods th at have been used by " other individuals" as ment ioned on Article 8 of these Detailed Rules.

Article 32 The scope of application of "VAT minimum threshold " as mentioned in Article 18 of the Regulations is limited to individuals.

The range of the VAT minimum threshold are stipula ted as follows:

(1)The minimum threshold for sales of goods shall be monthly sales amount of 600 to 2,000 yuan.

(2)The minimum threshold for sales of taxable serv ices shall be monthly sales amount of 200 to 800 yuan.

(3)The minimum threshold for assessment on a trans action-by-transaction basis shall be sales amound per transaction (or per day) of 50 to 80 yuan.

"Sales amount" as mentioned in the preceding parag raph refers to the "sales amount of small-scale ta xpayers" as mentioned in the first paragraph of Ar ticle 25 of these Detailed Rules.

The bureaux directly under the State Administratio n of Taxation shall determine the minimum threshol d locally applicable within the prescribed range and in accordance with the actual conditions, and shall report these amounts to the State Administra tion of Taxation for their records.

Article 33 The timing at which the tax liability arises on th e sales of goods or taxabie services as prescribed in Item (1), Article 19 of the Regulations is spe cified according to the different methods of settl ement as follows:

(1)For sales of goods under the direct payment met hod, it shall be the date on which the sales sun i s received or the documented evidence of the right to collect the sales sum is obtained, and the bil ls of lading are delivered to purchasers, regardle ss whether the goods are delivered;

(2)For sales of goods where the sales amount is en trusted for collection, including where entrusted to banks for collection, it shall be the date on w hich the goods are delivered and the procedures fo r entrusted collection are completed;

(3)For sales of goods on credit or receipt by inst allments, it shall be the date of collection agree d according to the contracts;

(4)For sales of goods with payment received in adv ance, it shall be the date on which the goods are delivered;

(5)For sales of goods on a consignment to other ta xpayers, it shall be the date on which the detaile d account of consignment sales are received from t he consignee;

(6)For sales of taxable services, it shall be the date on which the services are provided and the sa les sum is received or the documented evidence of the right to collect the sales sum is obtained;

(7)For taxpayers that have the activities that are considered as sales of goods as listed from Item (3) to Item (8) in Article 4 of these Detailed Rul es, it shall be the date on which the goods are tr ansferred.

Article 34 For overseas units or individuals selling taxable services within the territory but have not set up any business establishment within the territory, t he agents shall be the withholding agents for thei r tax payable. If there are no agints, the purchas er shall be the withholding agint.

Article 35 For business without a fixed base selling goods or taxable services in a different county (or city ) and have not reported and paid tax with the compet int tax authorities where the sales take place, th e competent tax authorities of the location where the establishments are located or where the indivi dual resides shall collect the overdue tax.

Article 36 "Tax authorities" as mentioned in Article 20 of th e Regulations is the State Administration of Taxat ion, and the collecing authorities thereunder.

"The competent tax authorities" and "the collectin g authorities" as mentioned in the Regulations and these Detailed Rules refer to branches offices un der the State Administration of Taxation at county level and above.

Article 37 "Above" and "Below" as mentioned in these Detailed Rules also include the figure or the level itself .

Article 38 These Detailed Rules shall be interpreted by the M inistry of Finance or by the State Administration of Taxation.

Article 39 These Detailed rules shall be implemented on the date the Regulations come into effect, The < Detailed Rules and Regulations for the Implementation of the Draft Regulations of the People's Republic of China on Value-Added Tax > and the < Detailed R ules and Regulations for the Implementation of the Draft Regulations of the People's Republic of Ch ina on Product Tax > promulgated by the Ministry of Finance on September 28, 1984 shall be repealed on the same date.