Editor's Note: Recently, the Ministry of Finance and the State Taxation Administration released the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" and solicited public opinions. The formulation of the Implementation Regulations of the Value-Added Tax Law is of great significance to the new "Value-Added Tax Law" which will come into force on January 1, 2026, as it will establish a new, complementary and interconnected value-added tax system. The currently published Draft for Comments on the Implementation Regulations generally retains the existing specific value-added tax rules but also contains many important changes. This article will focus on analyzing these nine important changes in the Draft for Comments, aiming to help taxpayers understand the situation and impact of these policy adjustments and attach importance to value-added tax compliance.

 

01 The taxable scenarios of "consumption within the territory" have expanded

Article 4 of the "Value-Added Tax Law" specifies four scenarios where taxable transactions occur within the territory. Article 4 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" provides a specific interpretation of "services and intangible assets consumed within the territory". When an overseas entity or individual sells services or intangible assets to a domestic entity or individual, it is generally regarded as consumption within the territory, with an exception: if the service is consumed on-site outside the territory, it is not considered as consumption within the territory. This provision differs from the current rules in the "Measures for the Pilot Implementation of Replacing Business Tax with Value-Added Tax" issued in 2016, mainly in the definition of the exception.

In practical scenarios, take the business of a domestic furniture manufacturer as an example. If the manufacturer pays advertising fees to a foreign advertising media to publish its product information and related introductory articles in foreign magazines, according to current regulations, this sales activity occurs entirely outside the territory and does not constitute the sale of services within the territory, so there is no need to withhold value-added tax for this fee. However, in accordance with the provisions of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)", since the advertising service does not meet the condition of being consumed "on-site" outside the territory, this sales activity will be deemed as consumption within the territory, and the domestic entity must withhold and pay value-added tax when paying fees to the overseas entity. If a domestic entity pays exhibition promotion fees to a local media organization at an overseas exhibition, since it meets the condition of on-site consumption, there is no need to pay value-added tax.

This potential future change means that some previous overseas service procurement activities that did not require payment of value-added tax will be included in the taxation scope, and enterprises with overseas service expenses need to pay close attention.

02 Clarification of the method for judging the main business and ancillary business in a single taxable transaction

For a taxable transaction that includes two or more businesses with different tax rates or levy rates, Article 13 of the "Value-Added Tax Law" stipulates that the tax rate or levy rate shall be determined based on the main business. Article 10 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" specifically stipulates the method for judging the main business and ancillary business. This rule has significant differences from the current rules specified in Article 40 of the "Measures for the Pilot Implementation of Replacing Business Tax with Value-Added Tax" issued in 2016, with the main differences reflected in the following aspects:

First, the scope of coverage is different. The current mixed sales rules only apply to combinations of services and goods and cannot cover other combinations of businesses with different tax rates or levy rates, such as services and services, goods and goods. The new regulations cover all cases where a taxable transaction includes two or more items involving different tax rates or levy rates, no longer limited to the concept of mixed sales, thus having a wider scope of application.

Second, the judgment criteria are different. The current mixed sales rules are based on the taxpayer's main business. If an enterprise is mainly engaged in the production, wholesale, or retail of goods, the mixed sales activity shall be taxed as the sale of goods; if it is mainly engaged in services, it shall be taxed as the sale of services. For example, a furniture wholesaler that sells air conditioners and provides installation services will be taxed at the 13% tax rate for the sale of goods because its main business is the sale of goods; while a construction enterprise that undertakes air conditioner installation services will be taxed at the 9% tax rate for services because its main business is services. However, under the provisions of the "Value-Added Tax Law" and the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)", the judgment criterion is changed to be based on the main business of the taxable transaction. By distinguishing between the main business and the ancillary business, the corresponding tax rate or levy rate is applied according to the main business, which is decoupled from the industry and main business of the enterprise itself.

However, the new regulations may lead to disputes in practical application. Take a construction and decoration enterprise as an example. In the past, when it sold air conditioners and provided installation services, it could be taxed according to the installation service, applying a 9% tax rate. But under the new rules, there may be ambiguity in understanding whether the nature and purpose of the transaction is to install air conditioners or to sell air conditioners. According to the provision that "the ancillary business is a necessary supplement to the main business and is premised on the occurrence of the main business", if the sale of air conditioners is interpreted as a prerequisite for the installation of air conditioners, then the sale of air conditioners may be identified as the main business, and the installation as the ancillary business. In this case, the business may need to be taxed at the 13% tax rate for the sale of goods, which may increase the tax burden compared to the previous 9% tax rate for services. In fact, there may be disputes over whether the actual purpose of the transaction should be identified as installing air conditioners or selling air conditioners, which is the prerequisite of which, and which is the necessary supplement of which, because the relevant provisions in the Draft for Comments are not detailed and scientific enough.

For enterprises, this future change in the rules requires them to pay more attention to judging the nature of transactions and the primary-secondary relationship of businesses when conducting business, accurately apply the corresponding tax rates and levy rates to ensure tax compliance, and pay attention to potential disputes in policy implementation and make preparations in advance.

03 Input tax deduction vouchers do not cover reverse invoicing situations

Article 12 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" specifies five situations where taxpayers can deduct input tax from output tax based on value-added tax deduction vouchers. Among them, the first four items basically correspond to the relevant content of the "Provisional Regulations on Value-Added Tax" issued in 2017, and the fifth item adds "the value-added tax amount indicated or included in other value-added tax deduction vouchers obtained from the seller". However, this provision does not cover the "reverse invoicing" situation in the current rules.

According to the "Announcement of the State Taxation Administration on Matters Related to 'Reverse Invoicing' by Resource Recycling Enterprises to Natural Persons Selling Scrap Products" (State Taxation Administration Announcement No. 5 of 2024), where a natural person selling scrap products sells scrap products to a resource recycling enterprise, a qualified resource recycling enterprise can issue invoices to the seller. In such business, the recycling enterprise in the renewable resources industry, as the invoice issuer, does not obtain the invoice from the seller (i.e., the natural person), which is inconsistent with the requirement for deduction vouchers "obtained from the seller" in the fifth item of the Draft for Comments, so the special situation of reverse invoicing is not included in the scope.

Since the introduction of the "reverse invoicing" policy, according to our practical observations, the implementation of this policy has not been satisfactory. Many practitioners are quite resistant to this policy, and even tax authorities in some regions do not allow local recycling enterprises to implement it. The "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" do not include "reverse invoicing" in the category of input tax deduction vouchers. It is difficult for the author to accurately judge whether this is just an oversight or a denial of this policy to a certain extent. It is suggested that entities in the renewable resources industry continue to pay attention to the evolution trend of relevant tax policies.

04 The scope of non-taxable items that are not taxable extra charges has been reduced

Article 15 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" stipulates the scope of non-taxable extra charges, which is narrower than that of Article 12 of the current "Detailed Rules for the Implementation of the Provisional Regulations on Value-Added Tax". Extra charges usually include packaging fees, transportation fees, quality insurance fees, etc., which generally need to pay value-added tax. However, some specific payments are excluded from the taxable scope due to their special nature, i.e., they are exceptions, and the seller does not need to pay value-added tax when collecting such payments. The reduction in scope this time is mainly reflected in two aspects:

First, the "advanced transportation fees that meet the conditions where the transportation fee invoice of the carrier is issued to the buyer and the taxpayer transfers the invoice to the buyer" in the current implementation rules are not included in the exceptions of the Draft for Comments. The question is whether such advanced transportation fees can be classified into the exception of "funds collected on behalf of the entrusting party with invoices issued in the name of the entrusting party" in Item 4 of Article 15 of the Draft for Comments. From the business process, when the seller advances the fee, the transporter issues the invoice to the buyer, and the buyer pays the fee after the seller transfers the invoice. However, it is not clear whether there is an entrustment relationship between the transporter and the seller. This means that although it may be possible to include it by relying on existing provisions, there are risks. If the tax authorities strictly enforce the rules, they may determine that it cannot apply to Item 4. If the "entrusting party" in Item 4 of Article 15 of the Draft for Comments is revised to "third party", there is no need to emphasize whether there is an entrustment relationship between the two parties, thus more comprehensively covering such advanced transportation fees.

Second, the "insurance fees collected from the buyer for acting as an agent for insurance when selling goods, and the vehicle license fees collected from the buyer on behalf of the buyer" in the original implementation rules are not included in the exceptions of the Draft for Comments, and only "the vehicle purchase tax collected from the buyer on behalf of the buyer" is retained. This means that the insurance fees and vehicle license fees collected by the seller from the buyer when selling goods are no longer non-taxable extra charges, and if not handled properly, they may need to pay value-added tax. For insurance fees, there is a certain room for solving this problem. For example, when selling a vehicle, the seller can let the buyer pay the insurance fee directly to the insurance company to avoid including it in its own extra charges. However, if the seller collects such fees on behalf of others, since they no longer belong to the exceptions, they will be identified as taxable extra charges and need to pay value-added tax.

Overall, the reduction in the scope of non-taxable extra charges places higher requirements on enterprises' management of extra charges. Enterprises need to re-examine the composition of extra charges, clarify the scope of taxable payments, and reasonably plan the way of receiving payments to reduce tax risks.

05 Re-clarification that loan service expenses cannot be deducted from input tax

After the adoption of the "Value-Added Tax Law", the items of input tax that cannot be deducted from output tax listed in Article 22 do not include loan services, which has caused speculation in the practical field about whether loan services can be deducted from input tax, forming two viewpoints. One view is that compared with the "Measures for the Pilot Implementation of Replacing Business Tax with Value-Added Tax", the "Value-Added Tax Law" does not directly mention that loan services cannot be deducted, so the input tax of loan services can be deducted. The other view, starting from the integrity of the value-added tax deduction chain, proposes that since deposit interest income is not subject to value-added tax, resulting in the incompleteness of the value-added tax chain, the purchase of loan services cannot be deducted. This time, Article 20 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" clearly stipulates that the input tax corresponding to the loan services purchased by taxpayers and the investment and financing consulting fees, handling fees, consulting fees and other fees paid to the lender directly related to the loan shall not be deducted from the output tax, thus maintaining the current rule that loan services cannot be deducted and resolving the speculation in the practical field.

06 Beauty medical institutions can no longer enjoy tax exemption policies

Article 28 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" clearly excludes beauty medical institutions from the scope of tax exemption, which is significantly different from previous tax policies. Item 7 of Article 1 of the current "Provisions on Transitional Policies for the Pilot Implementation of Replacing Business Tax with Value-Added Tax" has clarified the elements of value-added tax exemption for medical services from three aspects: the qualified subject providing services, the business scope, and the price standard. Accordingly, at present, institutions providing medical beauty services can enjoy tax exemption preferential policies if they meet three conditions: first, obtaining the "Practice License of Medical Institutions" upon registration; second, the services belong to the scope listed in the "National Standards for Medical Service Prices"; third, the service price is not higher than the guiding price of medical services formulated by the price competent department at or above the prefecture (city) level together with the health competent department at the same level and other relevant departments. In practice, the core of judging whether the medical services provided by beauty medical institutions can be exempted from tax lies in whether they meet the above conditions, and most institutions can meet the standards in practice and apply the tax exemption policy.

According to the provisions of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)", beauty medical institutions will be "one-size-fits-all" excluded from the scope of tax exemption, and whether they can enjoy tax exemption will no longer be judged based on whether they meet specific conditions. This adjustment may have an impact on the tax burden and pricing strategy of the medical beauty industry, and relevant enterprises need to pay close attention and deal with it in advance to adapt to policy changes.

07 The provisions on tax evasion echo the revision of the Tax Collection and Administration Law

Article 35 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" stipulates that "if a taxpayer fails to separately account for the sales volume and input tax of value-added tax preferential items, or illegally enjoys value-added tax preferential treatment through various means such as providing false materials, it shall not enjoy the tax preferential treatment. If it has enjoyed the value-added tax preferential treatment, the tax authority shall recover the corresponding taxes during the period when the preferential treatment is not allowed; if it constitutes tax evasion, it shall be handled in accordance with relevant regulations". The use of the term "tax evasion" is closely echoed with the content of the "Draft for Comments on the Revision of the Tax Collection and Administration Law" issued by the State Taxation Administration in March this year, fully reflecting the coordination within the tax legal system. The adoption of the concept of "tax evasion" in Article 35 of the "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" is not only a positive response to the revision direction of the Tax Collection and Administration Law but also reflects that the formulation of various tax laws to a certain extent forces the Tax Collection and Administration Law to accelerate the revision process.

08 Provision of a clear legal basis for affiliated invoicing

Article 36 of the Draft Implementation Regulations of the Value-Added Tax Law clearly defines the tax liability entity for affiliated operations. The first paragraph stipulates that "where an entity operates through contracting, leasing, or affiliation, the contractor, lessee, or affiliate (hereinafter collectively referred to as the contractor) conducts business operations in the name of the principal, lessor, or affiliated entity (hereinafter collectively referred to as the principal) and the principal assumes the corresponding legal responsibilities, the principal shall be deemed the taxpayer; in other cases, the contractor shall be deemed the taxpayer." This rule provides a legal basis for the affiliated party to issue invoices for the business of the affiliated entity in affiliated operations, thereby safeguarding the right of the invoice recipient to offset tax liabilities.

Specifically, for the affiliated party to issue invoices as a taxpayer, three conditions need to be met: first, there is an affiliated business relationship with the actual business operator. In practice, a written contract is strong evidence, and even if there is no written contract, a factual affiliated relationship is allowed; second, the actual operator conducts business in the name of the unit rather than an individual; third, the unit bears the legal liabilities related to the operation. It can be seen that even if the business is not hosted by the unit, as long as the above conditions are met, the unit can issue invoices on behalf of others, and this form of legal invoicing on behalf of others is clarified.

Previously, similar content appeared in the interpretation of the "Announcement of the State Taxation Administration on Issues Concerning Taxpayers Issuing Special Value-Added Tax Invoices to the Outside", which had a low legal rank. Now it is established at the level of administrative regulations of the State Council, with a significantly improved legal rank, which is of great significance. This rule echoes the judgment spirit of the Supreme People's Court in the typical case of Zhang Mouqiang's false invoicing, clarifies that affiliated operations do not belong to false invoicing, and enterprises receiving relevant invoices can normally deduct taxes, which helps to define guilt or innocence in criminal cases of false invoicing, provides a higher-rank legal basis for handling similar cases, and will have an important impact on the judicial trial practice of criminal cases of falsely issuing special value-added tax invoices.

09 Establishment of anti-avoidance clauses for value-added tax

The "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" adds Article 56 as an anti-avoidance clause, which clearly stipulates that "if a taxpayer implements an arrangement without reasonable business purpose to reduce, exempt, or delay the payment of value-added tax, or increase or advance the refund of value-added tax, the tax authority shall have the right to adjust it in accordance with reasonable methods. If there are other provisions in the law on investigating and dealing with the above acts, such provisions shall prevail". This clause reflects the trend of the state to strengthen supervision over various tax avoidance means and also provides a clearer law enforcement basis for tax authorities to deal with unreasonable tax avoidance behaviors such as business splitting. For example, in the "Case of Tax Evasion by Dongzhi County Rongfeng Renewable Resources Recycling Station and Sheng Rongfeng" announced by the State Taxation Administration, the involved entity split its business and set up 85 waste recycling stations to illegally enjoy the value-added tax exemption policy for small-scale taxpayers. Although the business is real, due to the lack of clear anti-avoidance clauses in the current rules for its behavior of evading tax burden by artificially adjusting the business model, the adjustment by the tax authority may face the problem of insufficient legal basis.

However, this clause has certain defects in terms of legal rank. According to the "Legislation Law", the basic tax system belongs to the matters reserved for laws and can only be formulated by the National People's Congress and its Standing Committee. At present, both the "Enterprise Income Tax Law" and the "Individual Income Tax Law" have anti-avoidance clauses at the legal level, and subsequent implementation regulations or supporting documents will be further refined. However, the "Value-Added Tax Law" itself does not stipulate anti-avoidance. This time, the implementation regulations, as administrative regulations, create this clause. Due to the lack of direct authorization from the superior law, its effectiveness may be questioned. Although the second paragraph of Article 40 of the "Draft for Comments on the Revision of the Tax Collection and Administration Law" stipulates that "if a taxpayer implements an arrangement without reasonable business purpose to reduce, exempt, or delay the payment of taxes, or increase or advance the refund of taxes, the tax authority shall have the right to make reasonable adjustments", if the revision is passed in the future, it can serve as an indirect superior legal basis for the anti-avoidance clause of the Implementation Regulations of the Value-Added Tax Law. However, the indirect nature of the legal source may lead to certain doubts about its effectiveness.

 

Conclusion: The "Implementation Regulations of the Value-Added Tax Law (Draft for Comments)" basically follow the existing value-added tax systems and are complementary and interconnected with the upcoming "Value-Added Tax Law". However, changes in some important rules are still worthy of full attention by enterprises and other taxpayers. With the subsequent formulation and implementation of the implementation regulations, enterprises need to continuously track policy trends, timely adjust tax planning and business models in combination with their own business characteristics, strengthen internal process management to prevent potential risks, and actively adapt to policy changes within the compliance framework. At the same time, we also look forward to the future value-added tax system, on the basis of ensuring the stability of national fiscal revenue, to further take into account the scientificity and operability of the tax system, create a more transparent and predictable tax environment for market entities, and effectively protect the legitimate rights and interests of taxpayers by clarifying the boundaries of rights and obligations, so as to contribute to high-quality economic development.