Shipping Agency Company: Solutions to Cope with VAT Reform

Posted by hwuason2012 on December 31, 2012 under Corporate Tax Planning | Read the First Comment

The Ministry of Finance and State Administration of Taxation (SAT) issued Circular Cai Shui [2012] No. 86, a supplementary notice in order to clarify certain tax issues in December. And shipping agency company shall pay close attention to this circular since it made substantial adjustments on specific taxable items.
1. Specific adjustments
Circular Cai Shui [2012] No. 86 abolishes some provisions with respect to shipping agency services of prior Circular Cai Shui [2011] No. 133 and Circular Cai Shui [2012] No. 53. According to Circular Cai Shui [2011] No. 133, shipping agency services belong to port services with a VAT rate of 6% and income derived from transportation services belongs to water transport services with a VAT rate of 11%. Later on, SAT issued Cai Shui [2012] No. 53 to cancel the previous classification and shipping agency services are entirely subjected to port services.
However, according to the latest circular, SAT relocates shipping agency services under forwarding services and international shipping agency services under international forwarding services, which apparently will have significant influences on shipping agency companies. Therefore, Hwuason Lawyers suggest the company keep informed with the amendments of law and comply with the law subsequently so that to avoid economic losses directly or indirectly caused by expiry of regulations.
2. Declaration and filling procedures of tax incentive
According to the law, shipping agency company can still enjoy the previous tax incentive under business tax, which means it can deduct the payments to non-pilot taxpayers from gross income as the amount of sales. However, the company needs to prepare materials and precede declaration and filling procedures in accordance with specific instructions by local authorities.
It is often the case that certain payment does actual occurs but the company is not able to get the required receipts. Trapped in this scenario, the company shall not deduct the payment otherwise it may face relatively high tax risks. On the contrary, the company shall resort to other solutions to reduce such losses, for instance, to select suppliers that are able to provide the deductable invoices.
3. Aware of the potential risks of false filling out VAT invoices
The VAT invoices are under strict regulations by the tax authorities in China so as to prevent tax evasions. In practice, the tax authorities will inevitably check the authenticity and accuracy of all items on the VAT invoice before deduction.
Shipping agency services are quite complex indeed which usually involve in proceeding declaration procedures for the vessel in and out of ports and the cargo import or export, cargo delivery, warehousing, transshipping, issuing B/L and contract of shipment, collecting freight, paying funds in/out, etc. What’s more, the company acts on behalf of owner, carrier or master as agent, which is likely to produce inconsistence in proceeds and sales among different parties. We’ve dealt with many significant cases concerning false filling out VAT invoices, some of which were due to complex agency relationships. Therefore, Hwuason Lawyers suggest the company be cautious about the following aspects. On one hand, the company shall fill out VAT invoices correctly otherwise it can’t be deducted. On the other hand, the company shall strengthen the management of VAT invoices to avoid potential tax risks.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). Or you can visit our website at www.hwuason.com.

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Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

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