Highlights of Announcement No. 22
Based on the implementation rules of VAT exemption for cross-border services stipulated by SAT Announcement  No. 52, Announcement No. 22 provides detailed guidance on the proving documentation for cross-border services and the instruction on VAT clearance.
1. The guidelines for filing VAT exemption
If companies are in one of the following two situations, they are eligible to apply for VAT exemption:
- Services rendered outside China (“Overseas services”)
- Services rendered to overseas services recipients (“Services for overseas recipients”)
2. The clearance for VAT paid during the previous pilot period
Observations for Announcement No. 22
1. Limited guidance on making regular VAT exemption application
Announcement No. 22 gives detailed guidance on the proving documentation for cross-border transaction services. However, it does not specify any requirements on the cross-border service contract, such as the contract parties, services location, service rate and amounts, payment terms, etc. In situation where we have a general framework contract without any service amounts and payment terms, will the Beijing state tax bureau accept a general framework contract for filing purpose or will it require a specific order to be filed each time or each month?
2. No actual time limit for the filed VAT during the pilot period
The Beijing State tax bureau allows taxpayers to submit the required documents of the VAT exemption application and clear tax for VAT paid for the clearance period covered before 31 March 2014. Furthermore, if the VAT exemption for qualified cross-border services was not filed during the previous pilot period, the VAT paid should be refundable or creditable even if the post-filing is to be performed after 31 March 2014. The tax bureau provides extension to apply for the VAT exemption if taxpayers cannot meet the tight deadline to collect all the required application materials within four months. To be prudent, the taxpayer should endeavor to submit the VAT exemption application materials before 31 March 2014 and need to liaise with the competent tax bureau in advance to apply for the extension under the circumstance mentioned above.
3. Compliance burden
It may be difficult for some taxpayers to collect all the cross-border service contracts, especially for those services provided between related parties. In this regard, taxpayers will face the dilemma of resigning contracts risks and losing the opportunity of enjoying VAT exemption. As it is required by the Announcement, in some circumstances, supporting material must be issued by competent third parties (e.g. the registration certificate for technology export, confirmation or offshore outsourcing services, etc.) which are both time consuming and costly. Even though it is possible to obtain those certificates, it is often quite difficult and usually takes a long time.
4. Need for further clarification
Announcement No. 22 does not require evidence for overseas derived income. Does it mean the taxpayers can claim VAT exemption if they have issued formal invoices, recognized the revenue accounting-wise but not yet received the service fees? It is necessary to confirm with the competent tax bureau whether the additional documents are required to prove the collection of overseas revenue, i.e. bank receipt, payment voucher. If it is mandatory, how can taxpayers claim for VAT exemption without evidence that the income is derived from overseas?