Will International Software Company Benefit from China’s New VAT Policy?

— the interpretation on the preferential policy of value-added tax

Recently, the Notice on the Policy of Value-added Tax of Software Product (the “Policy”) was jointly issued by the Ministry of Finance and the State Administration of Taxation of P.R.C., which shall back cover any VAT after 2011.1.1. The stock market reacts positively to the new policy.

However, as far as Bridge IP Commentary knows,the Policy is just the continuation of the past regulations, which include the Policies for the Development of the Software & Integrated Circuit Industries issued in 2000 (the “Policy in 2000”) and the Notice of Policies for Further Development of the Software and Integrated Circuit Industries released in first half of 2011 (the “Notice”). Even so, the introduction of the Policy once again shows the ambition of China government to boost the software industry. And the following is the interpretation on the Policy from Bridge IP Commentary:

I. The relief amount of VAT 

In practices, the refunded VAT is an integral part of software manufacturer’s profit in China, for it may take more than 20% net margin of some companies, as reported by National Business Daily, a noted financial newspaper in China. And therefore, no wonder many brokers are optimistic about the value of software shares in the market after its publishing.

The taxation rate of VAT as specified in Interim Regulation of the People’s Republic of China on Value Added Tax is 17%, while in the Policy, it’s explicitly alters to the regulation that any VAT of more than 3% shall be refunded to the tax payer. Actually, such relief was originally provided in the Policy in 2000, but it only effected till the end of 2010. For the further growth of the software industry, on the beginning of this year, the State Council of P.R.C. released the Notice to extend such preferential policy, which was reemphasized this time with the introduction of the Policy.

II. The preconditions on the preferences 

Though the Policy may benefit the growth of the industry, it does not cover all the software on sale. 

(1) The software covered by the refundable VAT

As explicated in the Policy, the software shall refer to the information processing program and all the documents and data related, including PC software, information system and built-in software. Among such defined software, the preference is mainly granted to two kinds of software on the market: the software developed by China entity and the localized imported software. And also, it’s defined that the localization involves redesigning, improvement and transformation, with the translation of the software excluded. Take WOW of Blizzard as the example, the VAT is not refundable for this game for the version operated in China is just translated without any localization in the Policy.

(2) The administrative approval and registration

The software shall pass mandatory approval and registration before enjoying the tax preference on the approval of taxation administration. One is to get the examination certificate issued by the institute approved by the software administration, and the other is the registration certificate from software administration or copyright office. (For the copyright registration, please refer to “The Copyright Registration in China Could Be FREE?” on our web site)

In fact, the taxation administration tends to demand the presence of software registration certificate in application, which is issued upon the holding of both the certificates from examination institute and copyright office. That means the application of VAT-cut demands all the certificate and application related as mentioned above.

III. The software exempted from the VAT 

The exempted ones include the software developed on the entrustment with the copyright belonging to the principal or both parties, as well as the software registered in the Copyright Administration with both the copyright and ownership transferred on sale.

At last, basing on our experiences, we estimate that the detailed local implementation measures for the policy may be released after the Policy, for this reason, it’s suggested to international companies to take a close attention on the updated development of the policy for the maximum of their business margin.

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Copyright reserved by Mr. You Yunting
Founder & Editor-in-Chief of Bridge IP Commentary
Partner & Attorney-at-law of Shanghai DeBund Law Offices
Email: Bridge@chinaiplawyer.com, Tel: 8621-5213-4900,
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Bridge IP Commentary is a website focus on the introduction of commercial laws in China, especially the intellectual property laws. All the posts here are our original works. All news or cases referred here are from public reports, and our comments or analysis are of due diligence, neutrality and impartiality, representing our own opinions only. You may contact us shall you have any opinions or suggestions.

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