China: Local tax supplementing VAT and consumption tax

New tax is no longer payable with respect to imports of services and intangible assets

New tax is no longer payable with respect to imports of services and intangible assets

A new tax—referred to in English as “The Urban Maintenance and Construction Tax” (UMCT)—is effective 1 September 2021.

This new UMCT is a type of local tax that is assessed and levied as a supplement to the value added tax (VAT) and consumption tax. It is levied as a type of turnover tax, assessed on a base that is itself a tax. But it is not a creditable tax.

This new tax replaces earlier UMCT provisional measures that have been in place for over 30 years (since 1985), but with certain changes having been made to pre-existing practices—with some confirmations and clarifications of these pre-existing practices. One of the most significant changes provides that this new tax is no longer payable with respect to imports of services and intangible assets. However, it is payable on the export of services.

The Ministry of Finance and the State Taxation Administration issued three guidance items—Announcements (2021) 26, 27, and 28—to explain and supplement the new law. The announcements also consolidate some of the key treatments that were previously discussed in the form of supplementary tax circulars or not clarified.

KPMG observation

Exclusion of the import of services and intangible assets from taxable basis of UMCT

Perhaps the most significant change brought about by the UMCT law is the confirmation that UMCT is not levied on the VAT or consumption tax paid in respect of imported goods and provision of services or intangible assets by overseas entities or individuals to Chinese businesses or consumers.

Before the recent enactment of the UMCT, it was clear that UMCT was not levied on the import of goods. This position was supported by a tax circular (Circular Caishuizi (1985) No. 69) and the position generally remains unchanged. However, the position with respect to the import of services and intangible assets was less clear. As a matter of practice, when domestic taxpayers withheld VAT on behalf of overseas entities in respect of service fees paid or payable to them, they typically withheld UMCT and other surcharges at the same time.

Article 3 of the UMCT law and Announcements (2021) 28 and (2021) 26 clarify that the taxable basis of UMCT no longer includes VAT and consumption paid with respect to the import of goods and provision of services or intangible assets by overseas entities or individuals to businesses or persons in China. This updated guidance, thus, reduces the tax costs associated with the receipt of cross-border services by domestic businesses, and also eliminates the need for domestic businesses and overseas service providers to negotiate which party is to be responsible for the relevant surcharges. 

It is worth noting that the above exclusion does not cover the sale of immovable properties. Therefore, it is expected that UMCT remains payable on VAT incurred as a consequence of any transfer or sale of immovable properties in China by overseas entities or individuals.

UMCT treatment on “exempt-credit tax amount”

An “exempt-credit tax amount” is an amount that generally exists for VAT-payers conducting export manufacturing businesses or businesses that conduct exports of services that are subject to an exempt-credit-refund VAT treatment. Very simply, it refers to the difference between the exempt-credit-refund amount and the actual refundable amount, as computed under the monthly exempt-credit-refund returns.

The UMCT position was relatively clear that such amounts formed part of the UMCT taxable basis for an export manufacturing business, according to Circular Caishui (2005) No. 25. However, the UMCT position was less clear as to whether such amounts incurred by a business carrying out exports of services forms part of the UMCT taxable basis. Before the effect of new law, local practices varied in this regard. 

Announcements (2021) 28 and (2021) 26 now clarify that the exempt-credit tax amount forms part of the UMCT taxable basis. In a practical sense, this increases the local tax costs associated with exports of services and intangible assets.

UMCT treatment on the refund of excess input VAT credits

The amount of refunded excess input VAT credits had been allowed to be deducted from the taxable basis of UMCT and other surcharges, according to Circular Caishui (2018) No. 80. This position remains the same under the new law. It is helpful to note that this position has been re-affirmed in the UMCT law.

Consistency in taxable basis among UMCT and other surcharges

Finally, while the UMCT provisional rules have now been replaced with the UMCT law, there is not a similar change observed in respect of the other two major types of surcharges in China (the education surcharge and the local education surcharge). A question therefore remains as to whether the UMCT positions would be similarly applied to the other two types of surcharges. In this regard, Announcement (2021) 28 clarifies that the calculation of the taxable basis of the education surcharge and local education surcharge is to be consistent with that of UMCT.

For more information, contact a KPMG tax professional:

Philippe Stephanny | +1 202 533 3082 |


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