Editor's note: The current Interim Regulations on Value-Added Tax do not explicitly stipulate the attribute of VAT as a tax excluded from the price, but relevant rules support the operation mode of such a tax. However, in some buyer's markets, the parties to a transaction may agree that the seller shall bear the VAT, that is, adjust the tax excluded from the price to a tax included in the price through the contract. China's VAT Law will come into effect on January 1, 2026, which clarifies the attribute of VAT as a tax excluded from the price in the form of law. After the implementation of the new law, whether the parties to a transaction can still adjust the tax excluded from the price to a tax included in the price through contractual agreements, what tax risks such agreements will bury, and how to timely adjust the provisions of contract clauses, these issues require market entities to pay attention.

01 Contractual agreement that "taxes shall be borne by the seller" does not obviously violate the current VAT rules

There are usually two situations where the buyer and seller adjust the form of VAT as a tax excluded from the price into a form similar to a tax included in the price through contract clauses: one is to clearly agree on a tax-exclusive price and have the seller bear the corresponding taxes; the other is to agree on a total transaction price, but at the same time agree that the buyer only has the obligation to settle the tax-exclusive price. Taking a goods transaction applicable to a 13% tax rate as an example, if both parties agree that the tax-exclusive price is 10,000 yuan and the tax is borne by the seller, such an agreement will trigger a series of legal issues: under the framework of the current Interim Regulations on Value-Added Tax and its implementing rules, is this contract clause valid?

First, let's look at the relevant provisions of the Interim Regulations on Value-Added Tax. Article 5 of the 1994 version of the Interim Regulations on Value-Added Tax stipulates that "the VAT amount calculated by the taxpayer on the sales volume and in accordance with the tax rate specified in Article 2 of these Regulations and collected from the purchaser for the sale of goods or taxable services is the output tax." Since then, although the regulations have been revised many times, mainly focusing on adjustments such as the replacement of business tax with VAT, the core content of the above clause has not changed. This article indirectly establishes the principle of VAT as a tax excluded from the price by defining "output tax", that is, the seller must not only collect the transaction amount of the goods from the buyer, but also collect the VAT amount separately. However, because the legal level has not made an absolute clarification on this principle, there is room for flexibility in the understanding and application of relevant provisions. Among them, the expression "collected from the purchaser" in this article can be regarded as a transaction right enjoyed by the seller, and the law does not 强制性 require its exercise, so the seller can also waive this right. In practice, there are indeed some situations where the seller voluntarily gives up collecting VAT from the buyer, which belongs to the legitimate disposal of its transaction rights and does not violate mandatory or prohibitive norms.

From the perspective of the validity of civil legal acts, Article 143 of the Civil Code stipulates that "a civil legal act shall be valid if it meets the following conditions: (1) the actor has the corresponding capacity for civil conduct; (2) the intention is truly expressed; (3) it does not violate the mandatory provisions of laws and administrative regulations, and does not violate public order and good customs." The current laws and regulations neither prohibit contracts from agreeing on "tax-exclusive prices" nor prohibit taxpayers from giving up collecting VAT from buyers. Therefore, such agreements belong to the independent arrangement of the parties to the transaction on whether the price includes VAT, fall within the scope of autonomy of will, and should be recognized as valid.

It should be clarified that the VAT liability arises from the occurrence of a taxable act and has nothing to do with contractual agreements. Regardless of how the two parties agree on the price, the seller, as the statutory taxpayer, must declare and pay VAT in accordance with the law when a taxable transaction occurs. The "tax-exclusive price" only indicates that the price does not include VAT, not that the tax liability is exempted, and its concept cannot exist independently of the tax collection and management system. This issue can be further analyzed in combination with the provisions of the Implementation Rules of the Interim Regulations on Value-Added Tax. Article 14 of the Implementation Rules stipulates that "where a general taxpayer sells goods or taxable services and adopts the method of combining sales volume and output tax in pricing, the sales volume shall be calculated according to the following formula: sales volume = tax-inclusive sales volume ÷ (1 + tax rate)". Theoretically, for a tax excluded from the price, the price and tax are collected separately, but in practice, the two parties to the transaction mostly settle with a one-time payment, and the separation of price and tax is often a follow-up operation. Taking the aforementioned case as an example, after the parties to the transaction agree to settle at a tax-exclusive price of 10,000 yuan, the tax authorities, in order to maintain the principle of tax excluded from the price, implement the requirement of substantive taxation, and facilitate collection and management, will regard this "tax-exclusive price" as the "total amount of combined pricing of sales volume and output tax", and calculate the sales volume as 10,000 ÷ (1 + 13%) ≈ 8,849.56 yuan according to the formula in Article 14 of the Implementation Rules, and the corresponding VAT amount is ≈ 1,150.44 yuan (8,849.56 × 13%). By adopting this reverse calculation method, the tax authorities regard the price paid by the buyer as the tax-inclusive price, and thus make another reverse adjustment to the agreement of the parties to the transaction. From the tax perspective, it is determined that the tax-exclusive payment made by the buyer is 8,849.56 yuan and the VAT amount borne is 1,150.44 yuan, which maintains the operation logic of VAT as a tax excluded from the price and more effectively urges the seller to declare and pay taxes in a timely manner.

The author believes that neither the Interim Regulations nor the Implementation Rules encourage or oppose the seller's waiver of the right to collect VAT from the buyer. Since the principle of tax excluded from the price is not a mandatory provision in the current rules, and does not deny the situation where the seller receives a one-time payment, it essentially reserves space for the contractual adjustment of the form from a tax excluded from the price to a tax included in the price. The seller can realize this arrangement by waiving the right to collect output tax. Therefore, the agreement between the buyer and seller to "settle at a tax-exclusive price" and "the seller shall bear the tax" solely for the purpose of re-arranging the subject of tax burden should be considered valid.

02 How should invoices be issued when "taxes are borne by the seller"?

As mentioned earlier, when the parties to a transaction agree to settle at a tax-exclusive price or the seller bears the tax, the price paid by the buyer to the seller will be adjusted by the tax authorities to a tax-inclusive price. Then, if the seller is to issue an invoice to the buyer, the total price and tax recorded on the invoice should be equal to the agreed tax-exclusive settlement price in the contract. Taking the aforementioned case as an example, the tax-exclusive amount recorded on the invoice issued by the seller to the buyer should be 8,849.56 yuan, the tax amount should be 1,150.44 yuan, and the total price including tax should be 10,000 yuan.

This will lead to a question: can the tax authorities directly equate the tax-exclusive settlement price agreed in the contract with the tax-exclusive price in the tax law and require the seller to pay VAT accordingly? That is, the tax authorities determine the tax-exclusive sales volume as 10,000 yuan, the VAT amount as 1,300 yuan, and guide the seller to issue an invoice with a total price and tax of 13,000 yuan. The author believes that the tax authorities cannot operate in this way. The reason is simple: Article 5 of the Interim Regulations on Value-Added Tax stipulates that "output tax" must be the amount actually collected by the seller from the buyer. The above practice of the tax authorities is only a calculated tax amount, which is not actually collected by the seller, so this calculated amount does not meet the constituent elements of output tax, and therefore the tax authorities cannot operate in this way.

However, if the buyer requires that the tax-exclusive amount recorded on the invoice provided by the seller must be the tax-exclusive amount agreed in the contract, then the seller should issue the corresponding invoice for the buyer while bearing more taxes on its own in accordance with the contract agreement. In this case, the tax authorities do not need to apply the reverse adjustment rule when levying taxes.

In practice, because the seller will bear a heavier tax burden when issuing invoices, it is easy to tear up the contract and have civil disputes with the buyer, which are then brought to the court. The seller usually claims that the contract clause is invalid and requires the buyer to bear the tax. The buyer usually claims that the contract is valid and the tax should be borne by the seller. It should be noted that there are certain differences in judicial practice rulings on such cases, with some supporting the buyer and others supporting the seller.

For example, the Intermediate People's Court of Lüliang City, Shanxi Province pointed out in the judgment (2019) Jin 11 Min Zhong No. 422 that whether the price agreed by both parties in the contract is a tax-inclusive price or a tax-exclusive price is a special agreement on the transaction price by both parties, which belongs to the scope of autonomy of will of the parties and does not violate mandatory legal provisions, and should be recognized as valid in accordance with the law. The Intermediate People's Court of Hangzhou City, Zhejiang Province pointed out in the judgment (2013) Zhejiang Hangzhou Shang Zhong No. 959 that the seller confirmed the "tax-exclusive unit price" when signing the contract and did not claim the tax during settlement, which should be recognized as waiving the right to pass on VAT, and has no right to require the buyer to pay additional taxes. The Higher People's Court of Guangdong Province pointed out in the ruling (2020) Yue Min Shen No. 2134 that the contract agreed that the rent does not include taxes and fees, but did not agree on the subject to bear VAT, in which case VAT should be borne by the statutory taxpayer. The Intermediate People's Court of Qingdao City, Shandong Province pointed out in the judgment (2021) Lu 02 Min Zhong No. 1442 that if the two parties have no agreement on the bearer of taxes, the seller in the sales contract has the legal obligation to issue VAT invoices and should pay VAT, and its request for the buyer to bear the tax has no factual and legal basis.

In addition, some courts have made opposite rulings, that is, if the purpose of such agreements by the parties to the transaction is to evade tax obligations and set obstacles for tax authorities to collect taxes, such agreements will be ruled invalid. Some courts also believe that it is more in line with the principle of fairness for the buyer to bear the tax.

03 After the implementation of the VAT Law, the contractual agreement that "taxes shall be borne by the seller" will be invalid

The VAT Law, which will come into effect on January 1, 2026, has adjusted relevant rules, and enterprises need to pay attention to its impact on the agreement of tax-related clauses between the parties to the transaction.

First, the legalization of the principle of tax excluded from the price will lead to the invalidity of agreements such as "settlement at tax-exclusive prices" and "the seller bears the tax". Article 7 of the VAT Law stipulates that "VAT is a tax excluded from the price, and the sales volume of taxable transactions does not include the VAT amount. The VAT amount shall be separately specified on the transaction documents in accordance with the provisions of the State Council." This clause establishes the attribute of tax excluded from the price at the legal level, and its core is that the transaction amount is tax-exclusive, and the buyer needs to pay the tax separately, that is, the tax burden must be passed on to the purchaser. After the law clearly stipulates the rules of tax excluded from the price, the buyer and seller can no longer adjust the subject of tax burden through contractual agreements. The payment of tax by the buyer has the characteristics of a legal obligation, and the collection of tax by the seller is no longer a right that can be waived, but a legal matter that must be completed. Therefore, under the influence of Article 7 of the VAT Law, the buyer and seller can only agree on the tax-exclusive price, but can no longer agree on "settlement at tax-exclusive prices" and "the seller bears the tax". Such agreements will be invalid because they violate the rules of tax excluded from the price in Article 7 of the VAT Law.

Second, the definition of output tax has changed from "calculated and collected" to "calculated", with "collected" deleted, leading to a change in the tax base.

It can be found that the VAT Law deletes the expression "collected" and replaces it with "calculated". This adjustment is not only a change in wording, but also reflects the difference in VAT collection and management. As mentioned earlier, under the provisions of the Interim Regulations and their implementing rules, the expression "collected" requires the tax authorities to confirm the tax-exclusive sales volume through the method of "reverse calculation of combined pricing", that is, to regard the "tax-exclusive price" agreed in the contract as the tax-inclusive sales volume. The expression "calculated" in the VAT Law means that the output tax is no longer the amount collected by the seller, but the amount that can be directly calculated based on the tax-exclusive price. In this way, the tax authorities have no obligation to "reverse calculate the combined pricing" and can directly recognize the tax-exclusive price agreed in the contract as the tax-exclusive sales volume, and then calculate the output tax. Taking the aforementioned case as an example, the tax authorities can directly calculate the tax amount as 1,300 yuan based on the tax-exclusive price of 10,000 yuan agreed in the contract to collect taxes. The rule of tax excluded from the price in the VAT Law requires the buyer to bear this 1,300 yuan tax. If the parties to the transaction still maintain such a contractual agreement, the buyer will actually have to bear more taxes, which is not worth the loss.

The author predicts that since the VAT Law deletes the constituent element of "collected" in output tax and sales volume, the implementing regulations to be issued by the State Council in the future will abolish the rule of "reverse calculation of combined pricing". Since the output tax is no longer bound to "collected from the purchaser" but is directly calculated based on the sales volume, the seller can, after paying the tax, claim from the buyer in accordance with the legal rules of tax excluded from the price. For the buyer, if it attempts to obtain transaction benefits by agreeing on a tax-exclusive price without paying taxes, it will fail due to the invalidity of the agreement, and instead lead to an increase in the actual burden cost.

04 Conclusion

After the implementation of the VAT Law, when enterprises formulate tax-related clauses in sales contracts, they need to follow the following compliance points: the contract should separately list the tax-exclusive amount, applicable tax rate and tax amount, for example, "the tax-exclusive price of the goods in this contract is 8,849 yuan, applicable to a 13% tax rate, the tax amount is 1,151 yuan, and the total price including tax is 10,000 yuan"; at the same time, flexible clauses should be agreed for tax rate changes, such as "when the tax rate is adjusted, the tax-exclusive price remains unchanged, and the tax amount is calculated according to the new adjusted tax rate". Considering that the tax rate is likely to show a downward trend, such an agreement to fix the tax-exclusive price can more effectively protect the rights and interests of both parties to the transaction. It should be clarified that the buyer and seller can still agree on the tax-exclusive price, but the clause "the tax shall be borne by the seller" will be invalid because it violates the legal principle of tax excluded from the price. At that time, the tax authorities will have the right to take the tax-exclusive price agreed in the contract as the tax base. After the seller fulfills the tax obligation, it has the right to claim the corresponding tax from the buyer. It is specially reminded here that enterprises need to pay great attention to this change brought about by the VAT Law, fully understand the key impact of tax-related matters in commercial transactions, effectively strengthen the awareness of tax compliance, and through standardized clause design, not only can effectively avoid transaction disputes, but also reduce tax-related risks from the source.