China’s State Administration of Taxation (SAT) issued guidance (Bulletin 42) that extends VAT-exempt treatment to all international freight forwarding services. The new rules went into effect on September 1, 2014.

This is a change from the VAT exemption for international freight forwarding services which became effective on August 1, 2013 [Circular 106]. Pursuant to Circular 106, international freight forwarding services are included in the scope of VAT-exempt services, but limited that exemption to those forwarders in direct business contact with, and making direct payments to, the international carriers. The SAT agreed with the Ministry of Finance (MOF) to correct the unforeseen problems created by this restriction, and released Bulletin 42 expanding the scope of the VAT exemption to all international freight forwarders and forwarding services in the international supply chain such as international cargo transport, transportation entering and departing the ports, and loading & unloading, provided that transactions are settled through a financial institution (“settling requirement“).

Although Bulletin 42 brings a welcome clarification, it remains unclear whether the common multinational international freight forwarder practice of a net settlement by offsetting receivables and payables satisfies the “settling requirement.”

Contact your MIQ Logistics representative for more information.

Nothing in this message is intended to constitute legal advice on Chinese tax issues. For such advice, you should consult with a qualified tax attorney or accountant.