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China – VAT Reforms: How Will Exemptions For Shipping And Airline Agents Be Applied?

24 April, 2014


Legal News & Analysis – Asia Pacific – China – Shipping Maritime & Aviation


The impact of the recent reforms in China (PRC) in practical terms has understandably been the subject of uncertainty and concern. Despite a broad official interpretation of the extent of the exemption from VAT to be applied to international forwarders earlier this year, a question remains in relation to how the VAT exemptions for international forwarders might be applied. 

In December last year, the Ministry of Finance of PRC and the State Administration of Taxation of PRC issued a notice, Notice [2013] No.106, that seemed to imply that only agents directly making payments to international transportation providers (i.e. airlines and shipping companies) would be eligible for an exemption from VAT. This caused concern for many freight forwarders providing international freight forwarding services. The majority of operators do not have direct contact with the international carriers and do not make direct payments to them. Of course, this left providers who do not participate in a direct relationship with the international carriers with concerns that they may not fall within the exemption and, as a result, be liable to pay VAT. 

Earlier this year, on 22 January 2014, the Ministry of Finance of PRC released an official interpretation to the VAT exemption policy for international freight forwarders. This interpretation confirms that that shipping and airline agents who make payments to international transportation providers directly or indirectly are entitled to VAT exemption. It appears that the official interpretation from the Ministry clarifies the situation for freight forwarders by stating that:


  • In the definition of international freight forwarding services (in Art. 1 (4) vi of Notice [2013] No.106), the wording of agents in consignees or their agents, consigners or their agents includes both direct and indirect agents. 
  • The wording of business operation related to cargo and shipping agency includes making a cargo reservation, business liaison, container management, account settlement and other operations in relation to international transportation of goods.
  • Taxpayers, whether or not they have direct business contact with international transportation providers, are entitled to VAT exemption in accordance with Notice [2013] No.106 as long as they fall into the above definition.

This official clarification would appear to bring to an end a period of considerable confusion for the freight industry in relation to Chinese VAT in confirming a policy of VAT exemption for international freight forwarders which places Chinese policy in line with the policy adopted by a majority of the major trading nations. The Ministry of Finance of PRC clearly considers that those agents who don’t directly make payments to international transportation providers (“second/third class forwarders”) can also enjoy the VAT exemption policy, as long as they fall into the definition in Notice [2013] No. 106 and its interpretation. This is because if only those agents who directly make payments to international transportation providers (“first class forwarders”) can be exempted from VAT, it creates a gap in the industry chain and increases the tax/capital burden of second/third class forwarders who are usually small domestic companies. 

However, Notice [2013] No. 106 was jointly released by the Ministry of Finance of PRC and the State Administration of Taxation of PRC. The State Administration of Taxation of PRC, which is ultimately in charge of enforcing the notice, may hold a different view in terms of the interpretation of the VAT exemption policy. Currently, the Ministry of Finance of PRC and the State Administration of Taxation of PRC are discussing how and to what extent to enforce such notice. Some local state administrations of taxation, including Qingdao Municipal Office of State Administration of Taxation, have decided for the time being not to follow the interpretation to Notice [2013] No. 106, in accordance with an instruction from their supervising department, namely the State Administration of Taxation of PRC. This means that the second/third class forwarders may not be able to enjoy the VAT exemption policy. 

In summary, although the official interpretation favours a broad exemption from VAT for international freight forwarders, it remains possible that it may not come into practice if the executive department proves to have a different understanding.



For further information, please contact:


Dimitris Seirinakis, Ince & Co
[email protected]

Zhouya Cai, Ince & Co
[email protected]


Ince & Co Shipping Maritime & Aviation Profile in China


Homegrown Shipping Maritime & Aviation Law Firms in China


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