Editor's Note:On December 25, 2024, the Standing Committee of the National People's Congress adopted the Value-Added Tax Law. On December 19, 2025, the State Council adopted the Implementing Regulations of the Value-Added Tax Law (hereinafter referred to as the "Implementing Regulations"). Both officially came into force on January 1, 2026, marking that China's value-added tax system has officially bid farewell to the era of "provisional regulations" and entered a new era of "taxation by law".The Implementing Regulations have integrated relevant contents from previous regulatory documents on export tax rebates,such as the Interim Regulations on Value-Added Tax, the Detailed Rules for the Implementation of the Interim Regulations on Value-Added Tax, the Circular of the Ministry of Finance and the State Taxation Administration on Fully Launching the Pilot Program of Replacing Business Tax with Value-Added Tax (Cai Shui [2016] No. 36), and the Circular of the Ministry of Finance and the State Taxation Administration on Policies Concerning Value-Added Tax and Consumption Tax on Exported Goods and Labor Services (Cai Shui [2012] No. 39). It has also restructured rules regarding the scope of cross-border taxable transactions, the identification and registration of general taxpayers, non-deductible input tax, and export tax rebates, which have exerted a significant impact on market entities. This article intends to analyze and interpret the changes in value-added tax rules, aiming to help taxpayers understand and respond to the new rules and changes.

I. Cross-Border Taxable Transactions Follow the Destination Principle, with an Overall Expansion of the Taxation Scope

In the past, the legislative approach to defining the tax treatment of domestic sales of services and intangible assets adopted a combination of positive enumeration and negative exclusion. On the one hand, positive enumeration stipulated that a transaction would be deemed a domestic sale if "either the seller or the buyer is located within the territory". On the other hand, negative exclusion clauses specified that "services entirely rendered outside the territory, intangible assets entirely used outside the territory, and tangible movable property entirely leased for use outside the territory, supplied by overseas entities or individuals to domestic entities or individuals" do not constitute domestic sales.The overlap between the scope of positive enumeration and negative exclusion gave rise to certain logical inconsistencies. For example, an overseas enterprise provides exhibition services that are entirely performed outside the territory to a domestic enterprise. From a positive perspective, since the buyer of the exhibition services is located within the territory, the services should be classified as domestic taxable services; from a negative perspective, since the exhibition services are entirely rendered outside the territory, they should not be regarded as domestic taxable services.In addition, there were no clear criteria for defining "entirely rendered outside the territory" or "entirely used outside the territory", which often led to disputes in practice. Some tax authorities held the view that "services entirely rendered outside the territory" must satisfy three conditions simultaneously: first, the services are provided by the seller outside the territory; second, the services are accepted by the buyer outside the territory; third, all elements related to the buyer's acceptance of the overseas taxable transaction, such as the payment address, telephone number, bank location, and place of service performance, are located outside the territory.From a semantic perspective, the first two conditions have been widely recognized, meaning that services entirely rendered outside the territory should require both the place of service provision and the place of service consumption to be outside the territory. However, the third condition has been highly controversial. Taking elements such as the payment address and bank location as criteria for determining the connection between the services and the territory seems to constitute an expansive interpretation.

The Implementing Regulations adopt more concise and clear abstract provisions combined with positive enumeration, which avoids logical contradictions in legislation and clarifies the connotation of relevant concepts. The taxation scope has been narrowed in some cases while expanded in others. Specifically:

First,instead of uniformly deeming all transactions where the buyer is located within the territory as domestic sales, the Value-Added Tax Law explicitly stipulates that only services and intangible assets consumed within the territory qualify as domestic sales. This establishes the destination-based taxation principle for services and intangible assets at the level of superior law. The Implementing Regulations further refine the abstract provisions on "consumption within the territory", featuring a clear legislative logic.

Second,for the sale of services, it is explicitly stated that "services consumed on-site outside the territory" are excluded from the taxation scope. Semantically, "on-site consumption outside the territory" emphasizes that both the place of service provision and consumption are outside the territory, without requiring all transaction elements such as the payment address to be located outside the territory. This resolves the long-standing disputes over the constituent elements of "entirely rendered outside the territory" and slightly narrows the taxation scope compared with the previous rules. Taking the aforementioned example, under the new rules, even if the domestic buyer makes the payment, since the exhibition services are provided and consumed on-site outside the territory, they are not classified as domestic taxable services, and the overseas enterprise is not required to pay Value-Added Tax in China.

Third,for the sale of intangible assets, there is an expansion of jurisdiction and a broader taxation scope. The exception clause for "on-site consumption outside the territory" applies exclusively to services, not to intangible assets. The Implementing Regulations stipulate that all sales of intangible assets by overseas entities or individuals to domestic entities or individuals shall be regarded as domestic sales. In effect, this removes the previous exception of "intangible assets entirely used outside the territory", which means that regardless of whether the intangible assets are used outside the territory, as long as the buyer is located within the territory, the transaction falls within the domestic taxable scope, resulting in a significant expansion of the taxation scope. For example, a domestic film and television company purchases the copyright of a best-selling novel from an overseas enterprise and agrees that the copyright is only licensed for use outside the territory. The domestic film and television company then commissions an overseas screenwriter to adapt the novel into a film and television work outside the territory, which is released overseas. Although the copyright is entirely used outside the territory, the overseas enterprise is still required to pay Value-Added Tax in China because the buyer is located within the territory.

Forth,for services and intangible assets as a whole, a new clause is added: any services or intangible assets sold by overseas entities that are directly related to domestic goods, immovable property, or natural resources shall also fall within the domestic taxable scope. It is important to note that this clause does not emphasize the buyer of the services or intangible assets. In other words, even if an overseas entity sells services or intangible assets to another overseas entity, the transaction will be deemed a domestic sale if it is directly related to domestic goods, immovable property, or natural resources. For instance, Overseas Enterprise A shoots a film mainly at the Palace Museum in China and then sells the copyright to Overseas Enterprise B. Even though both the seller and the buyer are overseas entities, the transaction is subject to Value-Added Tax in China because the copyright (as an intangible asset) is directly related to domestic immovable property. Another example is Overseas Enterprise A selling building renovation design services to Overseas Enterprise B, where the design services are intended for use in renovating a building located within China. Despite the fact that the design services are provided and consumed entirely outside the territory, the transaction is still regarded as directly related to domestic immovable property. The author believes that this clause actually emphasizes the formation process or the targeted object of the services or intangible assets. Even if the services or intangible assets are fully provided and consumed outside the territory, they will be included in the domestic taxable scope in accordance with the Implementing Regulations if their formation process takes place within the territory and is directly related to domestic goods, immovable property, or natural resources, or if the targeted object of the services or intangible assets is domestic goods, immovable property, or natural resources. However, the interpretation of this clause is subject to verification through detailed rules issued by the Ministry of Finance and the State Taxation Administration.

II. Restructuring of the Rules for Identifying General Taxpayers

In terms of the rules for identifying general taxpayers, the Implementing Regulations feature a clearer framework and more precise logic compared with the previous system. The Implementing Regulations define taxpayer categories based on tax calculation methods—any taxpayer applying the general tax calculation method shall be classified as a general taxpayer, regardless of registration status. Meanwhile, taxpayers whose sales volume exceeds the threshold for small-scale taxpayers must adopt the general tax calculation method. Small-scale taxpayers with sound accounting systems and the ability to provide accurate tax information may opt for the general tax calculation method upon completing general taxpayer registration.Furthermore, general taxpayer registration under the Implementing Regulations is more of an administrative registration rather than a qualification-based registration. Taxpayers exceeding the sales threshold are required to apply the general tax calculation method even without completing registration, and they are also entitled to obtain special invoices and claim input tax deductions. In contrast, the old rules were rather fragmented: first, the Interim Regulations on Value-Added Tax and its implementing rules did not define general taxpayers. Although a definition was provided in Annex 1 of the Circular of the Ministry of Finance and the State Taxation Administration on Fully Launching the Pilot Program of Replacing Business Tax with Value-Added Tax (Cai Shui [2016] No. 36), this document, as part of the "Business Tax to VAT" reform, only regulated taxable transactions involving services, intangible assets, and immovable property, excluding goods, thus failing to cover all taxable activities. Second, under the old rules, the registration was officially referred to as "general taxpayer qualification registration". Pursuant to Annex 1 of Cai Shui [2016] No. 36, taxpayers exceeding the sales threshold without completing registration were disqualified from claiming input tax deductions and using special invoices.

The Implementing Regulations also clarify the effective date for general taxpayer status. Taxpayers exceeding the small-scale taxpayer threshold shall compute and pay VAT using the general tax calculation method starting from the period in which the threshold is exceeded. Additionally, once registered as general taxpayers, they may not revert to small-scale taxpayer status. This has a significant impact on small-scale taxpayers who previously had issues with underpaid taxes, substantially increasing their tax compliance risks. When combined with the newly effective Announcement of the State Taxation Administration on Matters Concerning the Administration of General Taxpayer Registration (State Taxation Administration Announcement No. 2 of 2026), the key changes are as follows:

In the past, the Announcement of the State Taxation Administration on Matters Concerning the Administration of General Taxpayer Registration (State Taxation Administration Announcement No. 6 of 2018, now invalid) stipulated that "sales volume identified and recovered through tax inspections" should be included in the sales volume of the month (or quarter) when the supplementary tax return is filed, rather than the sales volume of the tax period to which the underpaid taxes belong. This meant that when tax authorities conducted inspections and recovered underpaid taxes from small-scale taxpayers, the corresponding sales volume was counted in the sales volume of the inspection period instead of being retroactively attributed to the original tax period. Only if the sales volume during the inspection period exceeded the small-scale taxpayer threshold would the taxpayer be reclassified as a general taxpayer starting from that period and subsequently required to compute and pay VAT using the general tax calculation method. For the original tax period of the underpaid taxes, VAT remained to be supplemented based on the small-scale taxpayer's simplified calculation method, i.e., "sales volume × levy rate".

Currently, Article 3 of the Announcement of the State Taxation Administration on Matters Concerning the Administration of General Taxpayer Registration (State Taxation Administration Announcement No. 2 of 2026) specifies that: "The annual taxable VAT sales volume refers to the cumulative taxable VAT sales volume of a taxpayer over a consecutive operating period not exceeding 12 months or four quarters. Any adjustments to sales volume arising from the taxpayer's voluntary supplements or corrections, risk control verifications, tax inspection recoveries, etc., shall be attributed to the corresponding tax period based on the time when the tax liability arises." Article 6 stipulates that: "Except as provided in Article 11 of this Announcement, where a taxpayer's annual taxable VAT sales volume exceeds the prescribed threshold, the general taxpayer status shall take effect on the first day of the period in which the threshold is exceeded." This means that when tax authorities conduct inspections and recover underpaid taxes from small-scale taxpayers, the corresponding sales volume is retroactively included in the original tax period of the underpaid taxes. If the sales volume of that original tax period exceeds the small-scale taxpayer threshold, VAT shall be supplemented using the general tax calculation method, i.e., "output tax (sales volume × tax rate) − input tax". In addition, for all periods from the original tax period of the underpaid taxes to the inspection period, the small-scale taxpayer who previously used the simplified calculation method must retroactively adjust their tax calculations to the general tax calculation method for each period. As mentioned above, for the procurement expenses of each retroactively adjusted period, taxpayers holding special invoices are allowed to confirm their eligibility for input tax deduction; if no special invoice was obtained at the time, a supplementary special invoice may be issued for the purpose of deduction confirmation.

It should be noted, however, that Article 11 of State Taxation Administration Announcement No. 2 of 2026 also clarifies the issue of retroactivity. For small-scale taxpayers with underpaid taxes for periods prior to 2026, if the inclusion of the corresponding sales volume in the original tax period results in exceeding the small-scale taxpayer threshold, the general taxpayer status shall take effect on January 1, 2026. In other words, the underpaid taxes shall still be supplemented using the simplified calculation method, and no adjustments shall be made to the tax amounts paid for the periods from the original tax period of the underpaid taxes to December 31, 2025. Nevertheless, for the periods from January 1, 2026, to the inspection period, the tax calculations must be adjusted to the general tax calculation method, and any additional tax liabilities shall be computed and paid accordingly. Overall, for small-scale taxpayers with underpaid taxes, the consequences are not limited to simply supplementing the taxes for the original period; they may also face retroactive adjustments to the tax amounts paid for all relevant periods, leading to a substantial increase in the cost of underpaid taxes.

III. Changes in the Connotation and Judgment Rules of Mixed Sales

Before the replacement of business tax with value-added tax (VAT reform), a single sales transaction might involve both VAT-taxable activities and business tax-taxable activities, such as selling an elevator together with accompanying installation services. Therefore, the essential connotation of mixed sales was a sales transaction involving different types of taxes. After the VAT reform, business tax was abolished, and the essential connotation of mixed sales evolved into a sales transaction involving both goods and services, limited to the combination of goods and services. Although the Implementing Regulations do not use the term "mixed sales", the objects regulated by its relevant provisions are essentially mixed sales transactions. The essential connotation of mixed sales has changed once again, referring to a taxable transaction that involves principal business and auxiliary business, where the principal and auxiliary businesses are subject to different tax rates or levy rates and have a clear principal-auxiliary relationship. This connotation is no longer limited to the combination of goods and services, representing a significant expansion compared with the past.

In addition, the handling rules for mixed sales have also changed. The old rules were based on the taxpayer's main business scope. In practice, this often led to uneven tax burdens, which undermined the principle of tax neutrality. For example, if a taxpayer whose principal business is the sale of goods conducts a mixed sales transaction, even if the value of the accompanying services is higher, the entire transaction must be taxed at the higher tax rate applicable to goods. Conversely, if a taxpayer whose principal business is not the sale of goods conducts a mixed sales transaction, even if the value of the goods involved is higher, the entire transaction must be taxed at the lower tax rate applicable to services. The Implementing Regulations, by contrast, are based on the principal business of each individual taxable transaction, rather than making a blanket judgment based on the taxpayer's overall main business scope. This is more refined than the previous rules and aligns with the substance of economic transactions. For instance, a transportation enterprise providing courier services: there is an inseparable relationship between pickup and delivery services and transportation services. In this transaction, pickup and delivery services constitute the principal business (subject to a 6% tax rate), while transportation services are the auxiliary business (subject to a 9% tax rate). Pickup and delivery services are the core purpose, and transportation services are a necessary supplement to achieve pickup and delivery, which is premised on the occurrence of pickup and delivery services, reflecting the core of the courier service business. Therefore, the entire transaction should be taxed as pickup and delivery services. In the future, identifying the principal and auxiliary businesses will become the key task, with the judgment rule mainly based on the "substance and purpose of the transaction". Taxpayers should pay full attention to this to avoid tax risks and make appropriate preparations.

IV. The Concept of Extra-charges Is Abolished, Reducing Tax-related Disputes

In the past, the legislation on extra-charges adopted a model of "positive enumeration + catch-all provisions + negative exclusion". It first listed the situations where additional charges were collected in disguised forms under various names in practice. To cover all possible scenarios, a catch-all provision of "other extra-charges of various natures" was added, while also listing the items that should be excluded. Taxpayers were required to judge one by one whether the amounts collected were classified as extra-charges. In particular, matters such as collected and paid-on-behalf fees and liquidated damages were relatively complex, which easily triggered disputes. Under the new rules, the concept of extra-charges has been abolished and replaced by the term "total consideration". The expression is more concise, and the core criterion for determining whether an amount constitutes sales proceeds is whether it is related to the taxable transaction that occurred. This simplifies the judgment process and reduces disputes. Take liquidated damages as an example: in the past, some tax authorities applied the law mechanically—if a seller collected liquidated damages from a buyer, it was automatically deemed that such liquidated damages were extra-charges. If the seller failed to declare and pay tax on the liquidated damages, it even faced the risk of being identified by the tax authorities as tax evasion. Now, when tax authorities determine whether liquidated damages fall within the scope of total consideration, they need to consider whether the collection of liquidated damages is related to the taxable transaction. For example, if both parties to a sales contract fail to perform the contract due to the buyer's breach, and the seller receives liquidated damages from the buyer, since the underlying taxable transaction does not exist, the collected liquidated damages have no connection with the taxable transaction and thus are naturally not part of the total consideration.

V. Sales Volume Verification Rules and Anti-Avoidance Rules Jointly Safeguard the VAT Tax Base

Before the replacement of business tax with value-added tax (VAT reform), the sales volume verification rules stipulated in the implementing rules applied to two scenarios: first, where the price was obviously low without justifiable reasons; second, where there was no sales volume in deemed sales transactions. Annex 1 to the Circular of the Ministry of Finance and the State Taxation Administration on Fully Launching the Pilot Program of Replacing Business Tax with Value-Added Tax (Cai Shui [2016] No. 36) made two adjustments to the first scenario: first, adding the circumstance where the price was obviously high; second, revising "without justifiable reasons" to "lacking reasonable commercial purpose". In addition, it retained the provisions on verifying sales volume for deemed sales transactions.On the whole, there were three problems:First,Fragmentation of anti-avoidance rules.Deemed sales mainly apply to gratuitous transfer transactions, as well as collective welfare and personal consumption matters, which are characterized by the absence of consideration and thus no sales volume generated. In contrast, obviously low or high prices involve existing sales volume, but such sales volume lacks legitimacy or rationality. Therefore, the adjustment logics for the two scenarios should be different. For the former, since there is no sales volume in itself, the adjustment objective should be to determine a fair sales volume. For the latter, where sales volume exists, the adjustment objective should be to ensure the legitimacy and rationality of the sales volume. However, a legitimate and reasonable price should take into account the specific circumstances of the taxpayer; it is not necessarily equivalent to the market price or fair value, but should be determined with reference to the prices of similar transactions in the same period.Second,incompleteness of anti-avoidance rules.Anti-avoidance rules are designed to regulate tax avoidance behaviors. Pricing is only one means of tax avoidance; tax benefits can also be achieved through other methods, such as planning the time when tax liability arises. The old anti-avoidance rules focused more on sales volume and failed to cover all tax avoidance scenarios.Third,confusion between "without justifiable reasons" and "lacking reasonable commercial purpose".For the circumstance of "without justifiable reasons", the burden of proof lies with the taxpayer, who is required to explain the reasons. Failure to provide explanations or evidence will result in adverse consequences for the taxpayer. For "lacking reasonable commercial purpose", the burden of proof rests with the tax authorities, which need to prove that the taxpayer has the intention to reduce, exempt or defer VAT payment, or to obtain tax refunds in advance or claim excessive tax refunds.

According to the provisions of the Value-Added Tax Law and its Implementing Regulations, most legislative contradictions have been resolved. However, the author believes that some issues remain unsolved:First,restricting the adjustment of obviously low or high prices to the circumstance of "without justifiable reasons" increases the burden of proof on taxpayers. Current tax laws contain very few provisions defining what constitutes "justifiable reasons". Although relevant rules for personal income tax list some examples, there are no principled provisions. This easily leads to restrictive interpretations of "justifiable reasons" by tax authorities in practice. From the perspective of basic tax law principles, the neutrality principle is a core principle of VAT, which requires minimizing interference in market activities. Pricing decisions, whether high or low, are the free choices of market entities and do not violate legal provisions. Therefore, tax law adjustments must be based on sufficient and definite grounds. Furthermore, an obviously low or high price will reduce or increase the output tax of the seller, while correspondingly increasing or reducing the input tax of the buyer. In general, this will not impair the overall tax revenue interest, making the necessity of such adjustments questionable. The author holds that anti-avoidance regulations should target behaviors that lack reasonable commercial purpose. For example, if one party has excess input tax credits, it may overstate its sales volume to help another party claim more input tax deductions, thereby impairing the overall tax revenue interest.Second,for deemed sales transactions, the Value-Added Tax Law stipulates that sales volume shall be determined based on the market price. Although deemed sales transactions are regulated separately, this provision is still not entirely reasonable. Deemed sales transactions involve no inflow of economic benefits, leaving taxpayers short of the necessary cash flow to pay taxes. Mandating the use of market prices to determine sales volume in all such cases may lead to an excessively high tax burden, which also violates the neutrality principle. For deemed sales of purchased goods, intangible assets, immovable property and financial products, taxpayers should be allowed to determine sales volume based on historical cost. This approach will not increase the tax liability of the seller. Meanwhile, if the buyer subsequently transfers the acquired taxable items, it will be required to pay VAT on the full amount of appreciation, thus preventing tax revenue leakage.

VI. New Concept of Non-Deductible Non-Taxable Transactions

Before the VAT reform, the VAT system included the concept of "non-VAT taxable items". At that time, the Interim Regulations stipulated that input tax on purchased goods or taxable services used for non-VAT taxable items was not deductible. Non-VAT taxable items mainly referred to business tax taxable items. After the VAT reform, business tax was abolished, and the concept of non-VAT taxable items was also removed from the revised Interim Regulations on Value-Added Tax in 2017.However, VAT taxable transactions do not cover all market activities, and there are still many non-taxable transactions in practice, such as equity transfers, transfers of partnership interests, assignments of accounts receivable claims, and transfers of assets together with associated claims, liabilities and labor force in asset restructuring. According to the provisions of the old Interim Regulations, there was no clear basis for requiring input tax transfer-out for purchases used in such non-taxable transactions.

The Implementing Regulations reintroduce the concept of non-deductible non-taxable transactions. All transactions outside the VAT taxation scope specified by law (i.e., domestic sales and deemed sales) are classified as non-deductible non-taxable transactions, except for four explicitly excluded types of transactions. It can be predicted that in the future, more detailed regulatory provisions may be issued regarding the use of purchased items. This will also require financial personnel to have higher professional competence, and taxpayers must accurately determine whether the ultimate use of purchased items falls under non-deductible categories. For example, if a taxpayer engages in equity transfer business and receives equity transfer consulting services from a law firm, obtaining a special VAT invoice, the input tax corresponding to the consulting invoice is not deductible because equity transfer constitutes a non-deductible non-taxable transaction.It should be emphasized that if purchased items are used for both deductible and non-deductible purposes, and the corresponding input tax can be separately identified, the non-deductible portion of the input tax can be directly determined. Only when separate identification is not feasible shall the non-deductible input tax be calculated based on the proportion of sales volume or sales revenue. In addition, the author deems it reasonable to exclude four types of transactions from non-deductible non-taxable transactions. For example, services provided by employees are non-taxable transactions but do not fall into the category of non-deductible non-taxable transactions. If a taxpayer rents an office and obtains a special VAT invoice, the office serves both as a venue for employees to provide services and as a place for the enterprise's production and operation activities. Requiring separate identification of the input tax on rent would be overly stringent and impractical.

In addition, the Implementing Regulations strengthen the annual liquidation system. In fact, provisions on annual liquidation were already included in Annex 1 to Cai Shui [2016] No. 36. Given that purchased items may be used for both deductible and non-deductible purposes, it may not be possible to correctly distinguish the applicable portion at the time of invoice acquisition and input tax confirmation, necessitating annual liquidation. However, due to the low legislative level of the relevant provisions, their implementation effect was not satisfactory in the past. The Implementing Regulations clearly stipulate that taxpayers shall calculate the non-deductible input tax for each period based on the proportion of sales volume or income, and conduct a full-year consolidated liquidation within the tax declaration period of January of the following year. It clearly defines the allocation method and liquidation time limit, which will become a regular regulatory measure in the future. If a taxpayer fails to distinguish mixed input tax and deducts the full amount, such behavior may constitute the tax evasion act of "fraudulent deduction of input tax" as defined in the judicial interpretation of crimes endangering tax collection administration.

VII. Significant Changes to the Input Tax Deduction Rules for Fixed Assets and Real Estate

China's initial VAT system was a production-based VAT, under which the tax base was calculated as the value derived from deducting the cost of raw materials and intermediate products from the sales revenue of goods and services, with no deduction allowed for the value of fixed assets. From a macroeconomic perspective, this value-added amount was equivalent to the gross national product (GNP). In 2008, the State Council promoted the transformation from a production-based VAT to a consumption-based VAT, permitting taxpayers to deduct the input tax incurred on purchased fixed assets.Under the previous rules, if purchased fixed assets, real estate, or intangible assets were exclusively used for projects eligible for simplified tax calculation, tax-exempt projects, collective welfare, or personal consumption, the entire input tax amount was non-deductible. Conversely, if such assets were exclusively used for projects eligible for general tax calculation, or mixed-used for both general tax calculation projects and other types of projects, the full input tax amount was deductible, with no need for proportional allocation even in cases of mixed usage.

The Implementing Regulations introduce major adjustments to these rules. For acquired fixed assets, intangible assets, or real estate that are mixed-used—i.e., simultaneously applied to general tax calculation projects as well as simplified tax calculation projects, tax-exempt projects, non-deductible non-taxable transactions, collective welfare, or personal consumption—such long-term assets shall be subject to differentiated treatment based on their original value.If the original value of the asset does not exceed RMB 5 million, the full input tax amount is deductible.If the original value exceeds RMB 5 million, the full input tax amount may be deducted upfront, but during the period of mixed usage, the non-deductible input tax corresponding to non-qualifying uses shall be calculated and adjusted annually over a specified amortization period.In the author’s view, this provision does not negate the consumption-based VAT system; rather, it refines and standardizes the tax regime. The previous policy of allowing full deduction regardless of mixed usage was relatively simplistic and effectively narrowed the tax base of the consumption-based VAT. However, the handling of input tax for long-term assets will undoubtedly become more complex in the future, requiring taxpayers to enhance their tax compliance efforts.

VIII. Clarifying Withholding Obligations for Taxable Transactions Involving Natural Persons and Strengthening VAT Supervision Over Natural Persons

In the past, VAT withholding applied only to non-trade foreign exchange payments and was not applicable to domestic VAT taxable transactions. The Implementing Regulations add a new provision stating that "where a natural person conducts a taxable transaction, the domestic entity making the payment shall act as the withholding agent". This represents a significant step forward in strengthening VAT supervision over natural persons and helps ensure the full collection of VAT revenues.Previously, in practice, when a domestic entity purchased goods or services from a natural person and made payment, it was only required to fulfill its withholding obligation for personal income tax. VAT, in principle, was to be declared and paid independently by the natural person. Even under the reverse invoicing policy for the renewable resources industry, the obligation of recycling enterprises to handle VAT declarations on behalf of natural persons was purely supportive in nature, rather than a statutory withholding duty. Consequently, such enterprises were not liable for penalties under Article 69 of the Tax Collection and Administration Law for "failing to withhold taxes that should have been withheld" if they fulfilled this supportive role.The expansion of domestic purchasers’ withholding obligations to cover VAT is undoubtedly a pivotal adjustment. The author argues that purchasers, as withholding agents, should also be granted the right to claim input tax deductions and pre-tax expense deductions. In particular, since the Implementing Regulations explicitly classify natural persons as small-scale taxpayers, a mechanism should be established to allow natural persons to obtain special VAT invoices on a commissioned basis when conducting taxable transactions. When a withholding agent fulfills its VAT withholding obligation, it should be permitted to either issue the special VAT invoice itself or obtain a commissioned invoice from the tax authorities. This arrangement would not only reduce the tax risk of enterprises seeking third-party invoicing due to the lack of source documents but also align the rights and legal liabilities of withholding agents.

IX. Strengthening the Administration of Export Tax Rebates

In the past, the legislative hierarchy of export tax rebate rules was relatively low, with most provisions formulated in the form of regulatory documents. Today, the legislative status of export tax rebates has been significantly elevated, marking a major advancement in implementing the principle of taxation by law and providing a higher-level legal basis for regulating the administration of export tax rebates. Specifically:

First,defining the concept of exported goods to provide clear rules for combating false export declarations.Exported goods are defined as goods that are declared to the customs, actually leave the territory, and are sold to overseas entities or individuals. The three essential elements are:The goods have been declared to the customs;The goods have actually departed from the territory;The goods are sold to overseas entities or individuals.Except for goods deemed as exports as stipulated by the State Council, any transaction failing to meet any of these three conditions may be identified by tax authorities as a false export declaration. Export enterprises must pay close attention to the associated export tax rebate risks.

Senond,clarifying the legal consequences of overdue declarations for export tax rebates (exemptions) and tax exemptions.Under the old rules, export enterprises were required to collect all supporting documents and file applications for VAT exemption, offset, and rebate within the period from the month following the customs declaration date to April 30 of the subsequent year. Failure to meet this deadline would disqualify the enterprise from claiming exemption, offset, and rebate benefits. Additionally, unreported tax rebate/exemption items would be subject to a tax exemption policy, while unreported tax-exempt items would be treated as domestic sales for tax purposes. Later, the rules on overdue declarations were optimized to allow supplementary filings after the deadline, removing the consequences of applying the tax exemption policy or treating unreported items as domestic sales, thereby reducing enterprises’ compliance costs.In contrast, the Implementing Regulations adopt a stricter stance: all export transactions with overdue declarations—whether for tax rebate/exemption items or tax-exempt items—shall be uniformly treated as domestic sales. Export enterprises must continuously and closely monitor newly issued export tax rebate policies for specific provisions on declaration deadlines.

Third,tightening the regulatory requirements for consignment export arrangements.The Implementing Regulations explicitly require consignor enterprises to complete the prescribed consignment procedures to qualify for export tax rebate benefits. If these procedures are not fulfilled, the consignor shall be obligated to declare and pay VAT, with the transaction also treated as domestic sales for tax purposes.