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FMC Explains China’s Decision to Exempt Shipping Transportation from VAT Regime

Thursday, December 26, 2013
Sandler, Travis & Rosenberg Trade Report

The Federal Maritime Commission indicated in a Dec. 19 press release that the Chinese government has issued a new circular clarifying its implementation of the value-added tax as it relates to maritime commerce. Slated to enter into force on Jan. 1, 2014, Circular 106 of Dec. 13, 2013, makes clear that the China Ministry of Finance and the State Administration of Taxation have jointly agreed to exempt shipping transportation from their recently implemented VAT law. The FMC understands that the exemption will be retroactive to Aug. 1, 2013, when the current arrangements first came into effect.

Chinese law requires foreign shipping companies to use either wholly-owned subsidiaries or third-party agents to collect ocean freight, while Chinese shipping companies can charge shippers directly without engaging a freight forwarder. Under the previous business tax regime freight forwarders were allowed to deduct international freight from their taxable income. However, under Circular 37 this deduction is no longer permitted. Instead, beginning from Aug. 1, 2013, freight forwarders are required to pay a 6% VAT charge as well as local surcharges (including the urban maintenance and construction tax, education levy and local education levy) on gross proceeds collected from clients, which means that foreign shipping companies end up bearing more tax burden than Chinese shipping companies. However, Circular 106 has eliminated the unequal tax treatment of foreign shipping companies by allowing the deduction of international freight from the taxable income of freight forwarders. 

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