On August 28, 2023, the Value-added Tax Law (Draft) was submitted to the Fifth Session of the Standing Committee of the Fourteenth National People's Congress (NPC) for the second time for deliberation, and on September 1, 2023, it was once again submitted to the public for public consultation. Back on December 27, 2022, the (Draft) VAT Law had been submitted to the Standing Committee of the 13th NPC for the first review. The second review draft of the draft published this time still adopts the idea of tax leveling, keeping the current tax framework and tax burden level basically unchanged, while adjusting some of the contents of the first review draft of the draft. This article will compare the specific contents of the first and second review drafts, analyze the main contents of the adjustments in the second review draft, and analyze and interpret the key contents of the second review draft.

I. Main elements of the changes in the Second Review Draft of the Value Added Tax Law (Draft)

The first draft of the Value Added Tax Law (Draft) consists of six chapters and 36 articles, and the second draft of the Value Added Tax Law (Draft) consists of six chapters and 37 articles. Apart from the adjustments of the numbering of the articles due to the additions and deletions of the articles, the second draft of the Draft contains 24 amendments compared with the first draft of the Draft. 

II. Main highlights of the Second Review Draft of the Value Added Tax Law (Draft)

(I) Improvement of the small-scale taxpayer system

The first review draft stipulates that the standards for small-scale taxpayers shall be stipulated by the State Council, while the small-scale taxpayer system has not been refined. The Second Review Draft includes the small-scale taxpayer standard directly in the VAT legislation and authorizes the State Council to make adjustments at the same time, which improves the legislative level of the small-scale taxpayer standard. The small-scale taxpayer standard belongs to the scope of the VAT taxpayer system, and it is stipulated by the law in line with the requirements of the principle of tax legislation. In addition, the Second Review Draft of the Bill has refined the conditions and procedures for small-scale taxpayers to choose to apply the general method of taxation, which makes the small-scale taxpayer system more complete and perfect. Among them, the specific conditions are basically consistent with the current VAT policy, but the procedures are different. According to the current policy, eligible small-scale taxpayers need to apply for general taxpayer qualification recognition in order to apply the general taxing method, while the second review draft adjusts "apply for qualification recognition" to "registration", which is conducive to the implementation of the principle of tax facilitation.

(II) A large number of authorizing legislative provisions have raised the level of authorization

The Second Review Draft of the Draft raises the legislative subject of specific cases of deemed sales, specific cases of differential taxation, scope of VAT deduction vouchers, specific cases of non-deductible input tax, methods of tax retention and refund, specific cases of prepayment of tax, and specific methods of tax refund (exemption) for export from the competent financial or taxation authorities to the State Council, and at the same time eliminates the power of the competent financial or taxation authorities to separately prescribe the tax withholding obligation of VAT in respect of special cross-border transactions. The power of VAT withholding agent has been abolished.

The act of deemed sales belongs to the scope of taxation, differential taxation belongs to the method of taxation, VAT withholding vouchers and conditions for input tax credit belong to the scope of calculation of tax payable, and tax set-aside, prepayment of tax, export tax refund (exemption), and withholding obligation for cross-border transactions belong to the scope of tax collection and management, which belong to the basic system of taxation, and can only be stipulated by law or authorized by the State Council, according to the provisions of Article 8 and Article 9 of the Legislation Law. The State Council shall prescribe them. The Second Review Draft adjusts the subject of authorization of these basic systems to the State Council and abolishes the authorization of the Ministry of Finance and the State Administration of Taxation, which is in line with the requirements of the Legislative Law and is conducive to the implementation of the principle of tax legislation.

(III) Clarification of taxpayers' right to choose tax credits

The first review draft of the draft stipulates that tax credits can be carried forward to the next period or refunded, but it is not clear whether the tax authorities or the taxpayers choose to deal with the two ways of dealing with the tax credits. The second draft clarifies that taxpayers have the right to make a choice, which is conducive to the implementation of the principle of protection of taxpayers' rights. At the same time, the Second Review Draft makes it clear that the State Council will issue specific measures for applying for tax credit refunds, which will become a supporting system of the VAT Law, and taxpayers should pay special attention to the relevant legislation of the State Council in the following period.

(IV) Limiting the Scope of Authorization for the State Council to Formulate Preferential Tax Policies on VAT

The Second Review Draft specifies that the State Council is authorized to formulate preferential tax policies for supporting the development of small and micro enterprises, supporting key industries and encouraging entrepreneurship and employment, etc. The scope of preferential policies has been limited, which on the one hand reflects that the policy orientation of the VAT tax preferences is in the three major areas of small and micro enterprises, key industries and entrepreneurship and employment, and on the other hand guards against the misuse of tax preferences and is conducive to the implementation of the principle of fairness of taxation. principle of tax fairness.

(V) Strengthening the implementation of the design of the "price-tax separation" system for VAT in civil and commercial transactions.

The Second Review Draft specifies that the amount of VAT shall be separately stated in the transaction documents. According to the general understanding, transaction certificates shall refer to civil and commercial transaction certificates such as contracts, shopping tickets, etc. This provision is conducive to the reduction of civil and commercial disputes triggered by the uncertainty of agreement between the two parties as to whether or not the price of the transaction is inclusive of tax, and to the ordinary consumers who can obtain the shopping tickets to know their burden of commodity tax, which is conducive to the protection of the right to know about the tax payable by the consumers, and to the enhancement of the consumers' awareness of the taxpayers. It is a concrete implementation of the principle of taxpayers' rights protection. However, strictly speaking, whether or not the transaction vouchers specify the tax amount belongs to the civil and commercial transaction habits and does not belong to the scope of VAT collection and management, therefore, it is more appropriate for the content of this provision to be stipulated by the civil and commercial law or economic law (e.g., the Law on the Protection of Consumers' Rights and Interests).

(VI) Refinement of the Advance Tax Payment System

The Second Review Draft refines the applicable circumstances and the time limit for payment of tax in advance. It is clear that prepayment of tax applies to cases where the taxpayer takes ten or fifteen days as a taxable period, and the taxpayer shall pay the tax in advance within five days from the date of expiration of the period.

(VII) More accurate use of some concepts

The first draft stipulates that the gift of goods, intangible assets, real estate or financial commodities is a deemed sale, and the second draft adjusts "gift" to "gratuitous transfer", which is a more accurate concept and is conducive to the realization of anti-avoidance of tax through the deemed sale system. The second draft adjusts "gift" to "gratuitous transfer". The first review draft of the draft stipulates the time of occurrence of tax obligation for deemed taxable transactions as "the day when the deemed taxable transaction occurs", but "the day when the transaction occurs" is still not specific enough, and the second review draft of the draft adjusts it to "the day when the deemed taxable transaction is completed". The second review draft adjusts it to "the date of completion of the deemed taxable transaction", emphasizing the "date of completion of the transaction", which can more accurately determine the time of occurrence of the tax obligation.

(VIIII) Adjusting the order of some provisions to make the law more logical

In the First Review Draft, the application of tax rate for part-time and mixed sales is stipulated in Chapter III "Taxable Amount", while the Second Review Draft adjusts these two provisions to Chapter II "Tax Rate", which is more in line with the logic of the chapters of the VAT Law. The first review draft stipulates that "input tax credit shall be based on legal tax deduction certificates" in the second paragraph of the provision on "Tax Allowance", while the second review draft adjusts it to the third paragraph of the provision on "Scope of Output and Input Taxes", which is more in line with the logic of the chapters of the VAT Law. The second review draft adjusted it to the third paragraph of the article "Scope of output and input tax", which is more in line with the logic of the provisions of the VAT Law.

III. Suggestions for Amendments to the Second Review Draft of the Value-added Tax Law (Draft)

The Second Review Draft has implemented the principles of tax law, tax fairness, tax convenience and protection of taxpayers' rights, which is of positive significance, but on the other hand, there is still room for further discussion on some articles. Taking into account the practical experience of Beijing Huatax Law Firm in the field of tax law, we would like to elaborate the proposed amendments as follows.

(I) Article 1 of the draft for second reading

Amendment: It is proposed to add a clause on "Legislative Purpose" before Article 1 of the Second Review Draft:

This Law is enacted in order to regulate the State's participation in the distribution of value-added generated from the circulation of goods, services, intangible assets and real estate, safeguard the State's fiscal revenue, protect the legitimate rights and interests of taxpayers such as the right of deduction, and safeguard the principle of tax neutrality of value-added tax (VAT).

Reasons for amendment: According to paragraph 5.1 of Section 2 of the Technical Specifications for Legislation (for Trial Implementation) (I), "The law generally needs to express the legislative purpose, and the expression of the content of ...... the legislative purpose should be direct, specific and clear, generally in accordance with the order from direct to indirect, from specific to abstract, and from micro to macro.", paragraph 5.1 of Section 2 of the Technical Specifications for Legislation (for Trial Implementation) (I) stipulates that "the law generally needs to express the legislative purpose. order", and paragraph 5.3 stipulates: "The legislative purpose ...... is generally expressed in the first ...... article, and the legislative purpose is expressed first ... .". In order to clarify the legislative purpose of the VAT Law, reflect the principle of VAT taxation in China, and lay down the fundamental value of VAT legislation in protecting the legitimate rights and interests of taxpayers, it is proposed to add the article of "legislative purpose", and the original Article 1 of the second review draft of the draft is postponed.

(II) On article 4 of the second reading of the draft.

Article 4 of the second reading of the draft: Amendment: It is proposed to be amended as follows: "Any of the following circumstances shall be regarded as taxable transactions and shall be subject to value-added tax in accordance with the provisions of this Law:

(1) Units and individual industrial and commercial households use self-produced or commissioned-processed goods for collective welfare or personal consumption;

(2) The transfer of goods by units and individual industrial and commercial households without compensation, except for the use in public welfare or for the benefit of the public;

(3) Units and individual transfer of intangible assets, real estate or financial commodities without compensation, except for use in public welfare or for the benefit of the public;

(4) units and individual business households to provide services without compensation, but for the public welfare or to the public as the object of the exception;

(5) Units and individual industrial and commercial households to distribute goods, intangible assets, real estate to shareholders or investors;

(6) Other cases stipulated by the State Council."

Reason for amendment: The Notice of the Ministry of Finance and the State Administration of Taxation on Comprehensively Pushing Forward the Pilot Project of Changing Business Tax to Value-added Tax (Cai Shui [2016] No. 36, hereinafter referred to as Cai Shui [2016] No. 36) and other documents exclude the donations "used for the public welfare undertakings or targeted at the public at large" from the deemed sales, which reflects the encouragement of enterprises and individuals to contribute to the public welfare undertakings. This reflects the basic orientation of encouraging enterprises and individuals to contribute to public welfare, but the Second Review Draft deletes this, which will form a tax obstacle to public welfare donations, and therefore suggests retaining the relevant content of the exclusion of public welfare undertakings.

Compared with the Implementing Rules of the Provisional Regulations on Value-added Tax and Cai Shui [2016] No. 36, the Second Review Draft has greatly reduced the scope of "deemed taxable transactions", but the important item of "distribution of goods to shareholders or investors" has not been clarified. For the distribution to shareholders, it can not be considered that there is an inflow of economic benefits to the enterprise, it is difficult to consider that it belongs to the scope of value-added tax, and this kind of behavior can not be classified as gratuitous transfers, such as special provisions of the behavior of the deemed sales treatment, will lead to the corresponding goods, intangibles, real estate deduction chain interruption.

(III) On article 5 of the second reading of the draft.

Article 5 of the second reading of the draft: Modification: Delete, or add expressions of tolerance and underpinning.

Reason for amendment: According to the principle of tax law, the tax law only needs to stipulate the cases that should be taxed, and the cases that are not taxed do not need to be specially stipulated, otherwise, it will cause confusion in the application of the law and lead to the wrong assumption that anything that is not included in the scope of non-taxation needs to be taxed in the collection of tax. From the basis of the protection of property rights, the gains and property of taxpayers should be in a natural state of non-taxation, while the property rights alienated under the Constitution for the purpose of forming the State may be burdened with the obligation to pay taxes only because of the explicit provisions of the law. Therefore, it is recommended that the article be deleted or that a tolerant, underpinning expression of non-taxable behavior be added in order to expand the scope of non-taxable behavior and avoid a restrictive interpretation of non-taxable behavior.

(V) On article 14 of the second reading of the draft.

Article 14 of the Second Review Draft: Article 14 Where a taxable transaction occurs within the territory of a foreign entity or individual, the purchaser shall be the person liable for withholding tax.

If the withholding agent withholds tax on behalf of the individual in accordance with the provisions of this Law, the amount of tax to be withheld shall be calculated by multiplying the sales amount by the tax rate.

Modification: It is proposed to amend the first paragraph of this Article to read: "If the purchaser is a domestic unit, the purchaser shall be the person liable for withholding tax if the taxable transaction occurs within the territory of a foreign unit or individual; if the purchaser is a foreign unit or individual, the seller shall declare the tax on its own".

Reason for amendment: In order to rationalize the relationship between collection and payment and to maintain the order of fiscal revenue, for cross-border service and intangible asset transactions, the buyer shall be the person liable for withholding tax, and in the case where the buyer is a domestic unit, i.e., the implementation of the "reverse levy" under the B2B mode, which is of high levy and management efficiency, but in the case of the B2C mode, the lack of incentives for individuals in the territory to pay tax makes it difficult to realize. However, in the B2C mode, the lack of motivation of domestic individuals to pay taxes makes it difficult to realize reverse collection, and the smooth implementation of the withholding and collection system cannot be guaranteed in the case where the purchaser is an overseas entity or individual.

Referring to the OECD's International VAT/GST Guidelines, it is more in line with the principles of tax neutrality and tax fairness for overseas service providers to file tax returns on their own, which can effectively solve the VAT collection and management problems under the B2C model. For example, Japan stipulates that in the case of B2B, the service recipient in the country should file a return and pay, and in the case of B2C, the non-resident supplier should register and pay the tax in Japan. Russia provides that offshore businesses that provide services to Russian residents via the Internet are required to submit relevant sales information to the Russian tax authorities and pay VAT at a rate of 18%. Australia requires non-resident suppliers to register in Australia and pay the required goods and services tax if their sales reach the starting point of the Australian goods and services tax of A$75,000 in a consecutive 12-month period.

Therefore, clarifying the taxpayer status of offshore suppliers when selling goods and providing services to domestic individuals is conducive to strengthening the supervision of offshore suppliers. And merging this paragraph into Article 1 is conducive to fixing the systematic and uniformity of concepts in the structure of the second review draft.

(VI) On article 15 of the second reading of the draft.

Article 15 of the second reading of the draft: Suggestion for amendment: It is suggested to amend the second paragraph of this Article to read: "Input tax refers to the amount of value-added tax (VAT) paid, incurred or deemed to have been incurred by a taxpayer on the purchase of goods, services, intangible assets, immovable property and financial commodities".

Reason for amendment: input tax is a neutral concept, the definition of input tax does not need to consider whether it is eligible for deduction or not, and the non-deductible input tax has been separately stipulated in Article 21, so there is no need to qualify the provision as "related to taxable transactions".

Under the current tax system, there are two special cases in which input tax is not actually paid or incurred but can be deducted: one is the purchase of agricultural products, which can be calculated according to the deduction rate of input tax; and the other is the 10% or 15% deduction of input tax for production and living service industries. Therefore, it is necessary to recognize these two special cases in the article.

(VII) On article 18 of the second reading of the draft.

Article 18 of the second reading of the draft: Amendment: It is proposed to add the second paragraph "If the market price cannot be determined, the tax authorities and customs shall have the right to determine the sales amount in the following order: (a) according to the average price of the taxpayer's recent sales of the same kind of services, intangible assets or immovable property; (b) according to the average price of the other taxpayers' recent sales of the same kind of services, intangible assets or immovable property. (iii) Determined in accordance with the constituent taxable price. The formula for the component taxable price is: component taxable price = cost × (1 + cost margin). Cost margins with reference to industry standards to determine".

Reason for amendment: For the absence of market price, or market price fluctuations, should specify the tax authorities, customs to determine the sales method, to avoid the tax authorities, the Customs and Excise Department to arbitrarily exercise the right to enforce the law.

(VIII) On article 23 of the second reading of the draft.

Article 23 of the second reading of the draft: Modification Opinion: It is proposed to add "(j) Taxpayers transfer all or part of the physical assets, as well as the debts, liabilities and labor force associated with them, to other units and individuals together in the process of asset reorganization; (k) interest income on deposits".

Reason for amendment: SAT Announcement No. 13 of 2011 and Cai Shui [2016] No. 36 have clearly stipulated that VAT shall not be levied on the transfer of all or part of the physical assets, as well as the debts, liabilities and labor force associated therewith to other units and individuals in the process of asset reorganization by way of merger, demerger, sale or replacement. This matter should be clarified in the current legislation. At present, there are two different treatments, non-taxable and tax-exempt, in the VAT regulations of various countries for the treatment of similar transaction types. Considering that the VAT rules for M&A reorganization are more complicated, such as the taxpayers' self-declaration of their own enjoyment is likely to cause subsequent disputes, and that there are mostly reporting requirements for such acts in practice, it is recommended to use the tax-exempt treatment. Deposits meet the definition of taxable transaction behavior, but the deposit behavior is currently not subject to VAT, which should be clarified in the tax exemption policy.

(VIIII) On article 27 of the second reading of the draft.

Article 27 of the second reading of the draft: Modification Opinion: It is proposed to amend Paragraph 1(1) to read "(1) When a taxable transaction occurs, the time of occurrence of tax obligation shall be the day when the sales payment is received or the receipt of the voucher for the sales payment is obtained".

Reason for amendment: VAT invoice is only a certificate for tax deduction, which belongs to the means and tools of tax collection and management, and should not affect the substantive legal rules of taxation, and it is a typical manifestation of the thinking of "tax control by invoice" to confirm the time of occurrence of tax obligation by the time of invoicing. From the viewpoint of the rule system of the second review draft, if the rule of confirming the time of occurrence of tax obligation by invoicing time is retained in the case of sales not reaching the legal starting point for tax exemption, the taxpayers may be given the space to manipulate the applicability of Article 29 by artificially adjusting the rhythm of invoicing to realize the purpose of tax avoidance. In addition, it also has an impact on the characterization of false VAT invoices. For example, for the sales behavior in future years, both parties sign the contract first, and the seller issues the invoice first in the current year according to the buyer's request, and the tax time of the transaction will also be changed according to the provision. However, whether this situation will be recognized as false VAT invoicing will be prone to disagreement and dispute.

(IX) On article 28 of the second reading of the draft.

Article 28 of the second reading of the draft: Modification: It is proposed that paragraph (5) be amended to read: "(5) The person liable for withholding and payment shall declare and pay the withheld tax to the competent tax authority of the place where the person has his/her organization or place of residence".

Reason for amendment: Based on the proposed amendment to Article 14, the withholding obligation of a cross-border transaction shall be fulfilled by the purchaser only when the purchaser is within the territory of the country, therefore, the situation in the second half of the sentence in item (e) is not applicable to withholding and payment and can be deleted. For cases where the purchaser of a cross-border transaction is outside the country, the provisions of item (ii) shall be applied to determine the place of taxation.