China’s VAT Credit Refund Policy: How To Succeed – Tax Authorities


Since March 2022, the Chinese government has implemented
value-added tax (VAT) credit refunds on a large scale to help
enterprises in specific sectors facilitate cashflow and sustain a
stable macroeconomic performance.

From April to May 2022, the VAT credit refunds totalled 1.34
trillion yuan. According to the Announcement [2022] No. 21,
starting from 1 July, companies in another seven sectors can now
enjoy the VAT credit refund policy, including businesses active in
wholesale and retail sales, agriculture, accommodation and
catering. China’s VAT credit refunds are expected to rise to
1.64 trillion yuan this year and become part of the usual routine
compliance for taxpayers.

Foreign businesses operating in China under the categories of
eligible companies are encouraged to apply for a full refund of
incremental VAT credit on a monthly basis, and a one-off refund of
their remaining VAT credit. However, when our tax specialists were
called upon to assist foreign businesses applying for VAT credit
refunds, they found the application process wasn’t that
straightforward. This article summarises the key challenges in the
VAT credit refund application process and shares our experiences in
liaising with the local tax authorities.

Liaising with the in-charge tax officers

In most cases where refund applications involve high amounts,
tax specialists need to liaise with the in-charge tax officers
regarding the composition of the VAT credit and the way it
cumulated throughout the tax periods. Here are some of the common
scenarios we have encountered in the past few months.

Immediate and straightforward refund

One of the tax bureau’s top priorities this year is to
promote VAT credit refunds in order to support taxpayers with any
cash flow problems following the global pandemic. Once taxpayers
have met the VAT credit refund requirements stipulated in
Announcement [2022] No.14, the in-charge tax officer may contact
them to help facilitate and speed up their applications. It is
important for taxpayers to act immediately, as per the instructions
of the in-charge tax officer. These types of applications are
generally quite straightforward, and the VAT credit refund can be
received within approximately one or two weeks.

Submission of a voluntary withdraw notification

When a taxpayer has applied for the VAT credit refund through
the online tax system, but the application is held up under a
pending status, the in-charge tax officer may contact the taxpayer
to explain the situation and request them to submit a withdraw
notification, stating that the taxpayer has voluntarily given up on
the VAT credit refund application for the current tax period. Apart
from the requirements stated in the Announcement [2022] No.14,
other factors such as suspicious forms for large amounts of VAT
input may cause the tax officer to hesitate or delay the
refund.

We would always advise companies to comply and actively
communicate with the in-charge tax officer to determine the reason
behind an initial rejection and reassess the likelihood of a
successful application in the next period. In the event the
in-house staff are not confident about resolving the outcome, the
taxpayer may wish to seek professional advice and outsource the
application to tax professionals or consultants.

Further information request

In the process of reviewing the taxpayers’ application, the
in-charge tax officer may come up with further questions about the
application, typically requiring an explanation letter on the
details of the VAT credit and company business within a very tight
timeframe. In this case, companies should take immediate action and
seek for tax professionals’ assistance in drafting the formal
explanation letter to precisely target the core subjects and put
the application back on track. Please note that the response period
allowed is often short (one to three working days at most). If the
taxpayer fails to submit the explanation letter within the response
period, they may miss the refund timeline and will need to wait for
the next application window after the next monthly filing.

Be ready for an all-around open and honest discussion about
your company’s tax situation

When unsure about the application process, or when planning for
some operational changes that could affect the current application
– such as a change of business scope – taxpayers should
take a proactive approach and discuss their plan with the tax
authorities on reasonable basis. We’ve seen various cases where
the tax authorities have publicly released fraudulent tax refund
cases in an attempt to warn taxpayers from filing faulty
applications. Therefore, engaging in open and honest communication
can help facilitate the process, optimise the success rate of
applications and improve one’s tax credit rating. Since 2022 is
the year of VAT refunds, we expect corresponding tax inspections
and increased scrutiny on taxpayers with high volumes.

Key considerations for VAT credit refund applications

As we have learnt from our experience in dealing with many
cases, different provinces, cities and districts have their own
processes and practice for reviewing VAT credit refund
applications. Below, we’ve listed some key considerations to
help companies plan ahead.

VAT input composition

Expect the tax authorities to ask for the input composition
details to ensure that the majority of the VAT input composition is
aligned with the taxpayer’s main businesses category. This is
often an important measurement to avoid fraudulent tax refunds and
provides support for taxpayers in the event of a drop in their
usual revenue streams.

The nature of VAT input

Services such as consultancy, technology services, decoration,
and designing services would often raise the tax authorities’
attention; taxpayers with a relatively large amount of VAT input
connected to the above type of services may need to provide further
supporting documents explaining the necessity and authenticity of
those transactions. For example, a retail company with a high
composition of technology service fees as its VAT input composition
could raise questions with the tax authorities due to the mismatch
of its main business (i.e. retail sales of goods).

An exaggerated VAT input credit

Tax authorities may dig out the historical tax filing records to
ensure that the VAT input credit has not been exaggerated in
previous periods. Taxpayers are often required to provide further
supporting documents and submit an explanation letter to justify
the source plausibility of the VAT input credit. It is commonly
seen in various sectors that sales income isn’t recognised in
time, due to the industry itself, the seasonal nature of sales or
other force majeure reasons such as the COVID-19 pandemic.
Taxpayers shall therefore need to keep and file proof of the
contracts, VAT Invoices and cashflow evidence to match documental
requests in case of further investigation.

The right strategy ahead

Healthy tax compliance is the foundation for a successful refund
and provides companies with a solid ground for explanations needed
during the application. Taxpayers should conduct a quick self-check
prior to applications to ensure their companies are eligible for
the tax refund requirements and ensure the application process will
not bring out any unforeseen liability.

An open, honest communication with the in-charge tax officer is
fundamental so that taxpayers can clearly understand the
requirements and the key factors to achieve the refund. Lastly,
seeking professional assistance can largely enhance efficiency and
mitigate the potential tax risks even after an initial
rejection.

How can Hawksford help?

Hawksford is an international provider of Corporate, Private
Client and Fund services. With extensive experience in Asia, we
provide company registration and outsourced corporate services in
China, including corporate accounting and taxation solutions.

With 100 multilingual professionals based in Shanghai, Beijing,
Suzhou, Guangzhou, and Shenzhen, we offer our international clients
the very best local knowledge and expertise. Our dedicated and
professional team will keep pace with the times and bring you the
timeliest tax policies and benefits.

Our specialised services include but are not limited to:

  • Tax registration

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  • Tax compliance, advisory, and implementation

  • Monthly and yearly bookkeeping and taxation services

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.