The Ministry of Finance and the State Administration of Taxation have jointly issued a circular announcing that China will scrap rebates on VAT on domestic equipment purchases by foreign-invested enterprises (FIEs) starting from 1 January 2009.

The new rule forms part of the nationwide VAT reform to make a uniform tax system. The following is the gist of the circular:

1. Effective 1 January 2009, the policy of providing FIEs with full VAT rebates on domestic equipment purchases made within the total amount of investment shall be scrapped.
   
   
2. In order to ensure smooth policy transition, FIEs that purchased domestic equipment before 30 June 2009 may opt for VAT rebate according to the original regulations if the information provided in the VAT special invoice has been verified correct. However, they must also fulfill the following conditions:
   
   (1) They must have obtained the Letter of Confirmation of Foreign-Funded Projects Conforming to State Industrial Policies before 9 November 2008 and have filed for record with the tax authorities before 31 December 2008.
   
   (2) They must have actually purchased the domestic equipment before 30 June 2009 with the VAT invoice issued, and have applied for tax rebate from the tax authorities.
   
   (3) The domestic equipment purchased must be included in the List of Domestic Equipment Purchased for the Project.
   
   
3. The amount of VAT payable on purchased domestic equipment eligible for VAT rebate may not be offset against output tax as input tax.
   
   
4. Domestic equipment eligible for VAT rebate purchased by FIEs shall be placed under the supervision of the tax authorities for a period of five years. During this period, if the enterprises are reincorporated into domestic enterprises, or in case of transfer of ownership, for example, if the equipment is transferred, given away as gifts, rented out or re-invested, they must reimburse the tax authorities according to the following formula:

Reimbursement due = net value of domestic equipment x applicable tax rate

The net value of domestic equipment refers to the net value of equipment after depreciation calculated according to the accounting system.