China sets VAT rate of 6% for its insurance industry

Rates and rules for implementing VAT in the last group of Chinese sectors including construction, real estate, finance, and life service have been announced by the country’s Ministry of Finance and National Taxation Bureau.

On 23 March 2016 China’s Ministry of Finance and the National Taxation Bureau jointly issued a Circular CAISHUI [2016] No.36, in which rates and rules for implementing VAT in the remaining group of sectors; including construction, real estate, finance, and life service industry were announced, with effect from 1 May 2016.

As set out in the Rules Implementing Measures of Value Added Tax in Replacement of Business Tax, insurance service is a taxable service and the applicable VAT rate is 6%; while agricultural insurance, export credit insurance, international transportation insurance, long-term life and health insurance are exempt from VAT.

Methods of calculation are provided in the rules, with provisions stipulating items that may be considered as a deductible input tax value. However, measures and policies that are specific to the insurance industry are still to come, as the rules didn’t provide indications to address the following concerns:

1. The insurance industry is generally confronting the problem of insufficient input-tax items for offsetting the output tax value. In addition, the change from business tax to VAT will see a change of the calculation of tax from a deduction from premium to an addition to premium. Such a change is abrupt and it will require guidance for grossing the tax to the price of insurance premium, especially for a market that has long been controlled by the state.

2. Under the business tax system, other parafiscal charges such as urban construction tax, educational surtax and local educational surtax are rates that were linked to the business tax rate. Now that business tax will be removed, what these taxes are to be fixed to, have not been specified.

3. Whether the parafiscal charges named above are included in the tax base of VAT is not clearly specified in the Rules.

In IPT Quote, TMF Group’s online tax calculation tool, the 5% business tax in China will soon be relegated to the history books, with an end date of 30 April 2016. In replacement, VAT as an addition to insurance premium will be in force for any policies incepting from 1 May 2016 onwards. At this point in time, the tax base for the calculation of VAT in IPT Quote won’t include other parafiscal charges, but this may change when the authorities issue clear instructions on how this will be handled.

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Ying  Chen
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