As of January 1, 2026, theValue-Added Tax Law of the People's Republic of China(hereinafter "VAT Law") and its Implementing Regulations officially took effect, marking the upgrade of China's largest tax category from administrative regulations to formal legislation. While maintaining the overall stability of the existing tax framework, this VAT legislation has refined and optimized a number of specific rules, which will have far-reaching implications for taxpayers' tax compliance management. To help market participants grasp the key points of the new rules and strengthen compliance management, Hua Tax lawyers Liu Tianyong and Yang Shengming recently published an article titled "Four Significant Changes and Impacts of the VAT Law and Its Implementing Regulations" inTaxation Research. The article focuses on the core changes introduced by the VAT Law and its Implementing Regulations, providing an in-depth comparison and analysis of the old and new VAT systems from four perspectives: the refinement of the input tax credit entitlement system, adjustments to credit restriction rules, changes in the scope of taxation for cross-border transactions, and the establishment of the general calculation method as the foundational tax computation method. The article also offers recommendations for institutional improvements. This timely and professional interpretation of the latest legislative developments provides taxpayers with an essential reference for accurately understanding the implementation points of the new law and mitigating tax compliance risks.

The full text is as follows:

Four Significant Changes and Impacts of the VAT Law and Its Implementing Regulations

Liu Tianyong, Yang Shengming

Abstract:On January 1, 2026, theValue-Added Tax Law of the People's Republic of Chinaand its Implementing Regulations officially took effect. Building on the integration of the previous VAT framework, four significant changes have emerged: First, with respect to the input tax credit entitlement, the new rules clarify the criteria for determining the buyer's right to credit, resolve disputes over liability for invoice issuance on behalf of others, and introduce a VAT withholding mechanism for natural persons to help curb the misuse of invoice procurement. Second, regarding credit restrictions, the new rules reintroduce the concept of non-taxable transactions, impose additional credit restrictions on long-term assets, clarify the legal significance of general taxpayer registration, and establish an effective settlement mechanism, all of which better align with the principle of tax neutrality. Third, concerning the scope of taxation for cross-border transactions, the new rules clarify the taxing rights based on the place of issuance for financial products, resolve disputes over the determination of "entirely occurring outside China," and expand the scope of taxation for imports of services and intangible assets, thereby better protecting the tax base. Fourth, in terms of tax calculation methods, the new rules establish the general calculation method as the foundational method, clarify that taxpayers whose annual sales exceed the threshold automatically apply the general calculation method from the relevant period, and require that supplemental tax amounts from audits be attributed to the tax period in which the liability arose rather than the correction filing period, thereby enhancing tax fairness and combating tax evasion. By comparing the old and new VAT legal frameworks, identifying institutional innovations and practical highlights, and recognizing areas requiring further refinement, this article aims to provide intellectual support for building a scientific, comprehensive modern VAT system suited to high-quality development.

Keywords:VAT Law, input tax credit entitlement, scope of taxation, tax calculation method, tax neutrality

Value-added tax (VAT) has two core characteristics. First, its broad tax base covers the vast majority of market entities, which is the primary reason VAT ranks as China's largest tax category. In 2025, national general public budget revenue reached RMB 216,045 billion, of which domestic VAT revenue (excluding import VAT) accounted for RMB 68,947 billion, or 31.91%. Second, VAT is an indirect tax, meaning the nominal taxpayer and the actual bearer of the tax burden are separate; the tax is ultimately borne by end consumers through the mechanism of tax shifting. When individual consumers purchase taxable goods, services, and other taxable items, they generally bear the corresponding VAT burden. These two characteristics collectively determine that VAT has an extremely broad reach, directly affecting the vital interests of the general public, which has long made VAT legislation a key issue in China's tax rule-of-law development. The rules governing input tax credit entitlement, credit restrictions, the scope of taxation for cross-border transactions, and tax calculation methods are all critical components of the VAT system and are among the most important aspects of VAT legislation. The VAT Law and its Implementing Regulations have systematically optimized the rule design and underlying logic of these institutions, introducing necessary new tax concepts, refining legal language, and resolving many long-standing practical issues in tax administration. This represents a significant and successful legislative achievement, marking major progress in implementing the statutory taxation principle in China.

I. The Input Tax Credit Entitlement Begins to Take Shape

(1) Basic Elements of the Input Tax Credit Entitlement

VAT is a broad-based consumption tax, whose core objective is to tax final consumption. Unlike sales-stage-only consumption taxes, however, VAT's essential characteristic lies in its multi-stage collection mechanism, taxing at each stage of production, distribution, and sale, with all enterprises in the industrial chain acting as nominal taxpayers. The multi-stage collection mechanism helps ensure the timely realization of fiscal revenue, but it also means that the VAT system must be designed with a tax credit mechanism to avoid double taxation (Li Nannan, 2025). The input tax credit entitlement is the foundation of the tax credit mechanism. When a taxpayer purchases goods, services, intangible assets, real property, and other taxable items for use in taxable activities subject to the general calculation method or in tax-exempt activities as specifically provided by law, the taxpayer acquires the right to credit the tax borne on those purchases—this is the substantive element of the input tax credit entitlement (Schenk et al., 2018). The taxpayer must obtain statutory credit documents to exercise the credit—this is the formal element (Wang Zongtao, 2019).

(2) Deficiencies and Problems of the Old Law Regarding the Substantive Element

TheProvisional Regulations on Value-Added Tax(hereinafter "Provisional Regulations") and its Implementing Rules provided for the formal element of the tax credit, specifying the types and scope of creditable documents, but the provisions on the substantive element were rather general. The old legal framework did not directly clarify how to determine whether a taxpayer "paid or bore" input tax when engaging in taxable transactions, leading to various practical problems.

Impacting the determination of the buyer's input tax credit entitlement.Article 5 of the Provisional Regulations provided: "For a taxpayer's taxable sales activities, the value-added tax calculated at the rate prescribed in Article 2 of these Regulations on the basis of the sales amount shall be the output tax." This provision defined output tax not only by its calculation method but also emphasized the behavioral element of "collection." Moreover, because the Provisional Regulations did not clearly establish VAT as a tax-exclusive (price-separate) tax, the legal basis for the seller to collect output tax was ambiguous. When a taxpayer engages in taxable sales activities, may it choose not to perform its obligation to collect output tax? If the seller and the buyer agree that output tax will not be collected, but the seller still calculates and pays VAT based on the total consideration received as a tax-inclusive price, can it be determined that the buyer did not actually bear the input tax? Can it be determined that the parties improperly understated their tax liability? If the seller intentionally fails to collect output tax and fails to file a tax return, but the buyer is unaware of this, can it be determined that the buyer did not bear the input tax? If so, why does the tax authority have no power to pursue the buyer, who should have borne but did not bear the input tax, for the tax due? These questions directly affect the determination of the seller's tax liability and the boundary of the buyer's input tax credit entitlement.

Impacting the criminal liability determination for "truthful replacement invoicing."The concept of "truthful replacement invoicing" originates from theReply of the Research Office of the Supreme People's Court on How to Determine the Nature of the Conduct of Operating in the Name of an Affiliated Company and Having That Company Issue Special VAT Invoices on One's Behalf(Fa Yan [2015] No. 58), which in its second article proposed the situation where "a person uses another's name to engage in business operations and has special VAT invoices issued in that other's name... where there is no affiliation relationship between the person and the other." In practice, it is generally considered that if the person has actually engaged in business activities and the total amount stated on the replacement invoices does not exceed the consideration actually received from the business activities, this constitutes truthful replacement invoicing. Article 10 of theInterpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases of Tax Offenses(Fa Shi [2024] No. 4) clarifies that "where the purpose is to inflate performance records, raise financing, obtain loans, etc., and the act is not aimed at fraudulently obtaining a tax credit through offset, and no loss of tax revenue has resulted from the offset," the conduct shall not be punished as the crime of issuing special VAT invoices for fraudulent purposes. At the same time, Article 1 clarifies that "falsely claiming input tax credits" shall be deemed a "means of deception or concealment" constituting the offense of tax evasion. Teng Wei et al. (2024) have argued that where the recipient obtains fraudulently issued input invoices from others under the guise of paying "invoicing fees" or "tax points" and uses them for credit, this creates a relationship of illegal sale and purchase of special VAT invoices. If the recipient obtains fraudulently issued invoices and uses them to fraudulently obtain a tax credit resulting in tax loss, this constitutes the crime of issuing special VAT invoices for fraudulent purposes; if used for false crediting to underpay or avoid tax, this constitutes the crime of tax evasion; if used for other non-criminal purposes, it may only constitute the crime of illegal purchase of special VAT invoices. The above provides a basic framework for distinguishing between the crimes of fraudulent invoicing, tax evasion, and illegal purchase. In the specific case of truthful replacement invoicing, if it is considered that when the seller waives collection of output tax, the buyer also does not bear input tax, then the buyer's procurement of replacement invoices from a third party for credit purposes constitutes a credit of tax that never existed, satisfying neither the formal nor the substantive elements of the credit entitlement. If the falsely inflated input tax exceeds the scope of the tax liability, this constitutes fraudulent crediting of tax and should be punished as the crime of issuing special VAT invoices for fraudulent purposes; if it does not exceed the scope of the tax liability, it constitutes false crediting resulting in underpayment or non-payment of tax and should be punished as the crime of tax evasion. Conversely, if it is considered that the buyer bears input tax merely by virtue of the actual occurrence of the taxable transaction, regardless of whether the seller collected output tax, then the seller's failure to properly file a tax return should be pursued as the seller's concealment of income and tax evasion. If the buyer obtains third-party replacement invoices merely to satisfy the formal element of the credit entitlement, and the input tax added by the replacement invoices does not exceed the input tax actually borne by the buyer, then the replacement invoicing only disrupts the invoice management order without harming national tax interests, constituting neither tax evasion nor the crime of issuing special VAT invoices for fraudulent purposes, but only possibly the crime of illegal purchase of special VAT invoices. This ambiguity affects the criminal liability determination for truthful replacement invoicing.

Leading to a high incidence of invoice procurement fraud.The old law's failure to address the credit entitlement for purchases from natural persons became a reason for the high incidence of invoice procurement fraud. Article 29 of the Implementing Rules of the Provisional Regulations and Article 3 of theMeasures for the Pilot Collection of VAT on the Replacement of Business Tax with VAT(Cai Shui [2016] No. 36, hereinafter "Measures") provided that other individuals (natural persons) whose annual taxable sales exceed the small-scale taxpayer threshold are not considered general taxpayers and are taxed as small-scale taxpayers. However, in tax administration, particularly regarding invoice issuance, other individuals are not treated on an equal footing with small-scale taxpayers. Only where the law specifically provides—such as for other individuals leasing or selling real property, providing agency services for insurance, securities, credit card, tourism, and other enterprises entrusted by tax authorities to collect taxes, engaging in domestic road freight or inland water freight transport and having completed provisional tax registration, agricultural producers selling self-produced agricultural products, or individual sellers of scrap products selling to qualified resource recycling enterprises—may other individuals' taxable sales activities be invoiced, reverse-invoiced, or have invoices issued by tax authorities on their behalf with creditable functions. In all other cases, they cannot issue special VAT invoices in the same manner as small-scale taxpayers. Consequently, industries relying heavily on natural persons as primary suppliers—such as labor-intensive industries, transportation and logistics, and agricultural product procurement—face widespread shortages of source invoices (Yang Bin et al., 2024), leading to a high incidence of illegal invoice procurement.

(3) The New Law's Construction of and Impact on the Substantive Element of the Input Tax Credit Entitlement

Article 7 of the VAT Law explicitly states that "VAT is a tax-exclusive tax," and the refund mechanism for excess input tax credits provided in Article 21 further confirms VAT's tax-exclusive nature. Tax-exclusive pricing means that the consideration received by the seller for a taxable transaction specifically comprises two components: the tax-exclusive price and the VAT amount. On this basis, Article 16 of the VAT Law optimizes the definition of output tax, providing that "output tax means the VAT amount calculated by multiplying the sales amount by the tax rate prescribed in this Law for a taxpayer's taxable transaction." This definition no longer emphasizes the seller's act of "collection," but instead treats the amount calculated directly from the sales amount and the tax rate as output tax. From this, it follows that the collection of output tax is mandatory and does not depend on the taxpayer's will.

Resolves the issue of determining the buyer's input tax credit entitlement.Under the VAT Law, whenever a seller engages in a taxable transaction subject to the general calculation method, output tax is necessarily generated. Given VAT's tax-exclusive nature, the output tax and the tax-exclusive price together constitute the selling price of the taxable item, and the buyer naturally bears the input tax when paying that price. The fact that the buyer bears input tax does not depend on the seller having completed its tax filing. If the seller fails to file a tax return, resulting in underpayment of tax, the buyer still bears the input tax. If the seller, for competitive market reasons, subjectively intends to forgo collecting output tax to lower the selling price—shifting the tax burden to the buyer—and then profits through tax evasion, such purpose is not recognized by tax law. Since the collection of output tax is the seller's statutory obligation and cannot be waived, the seller's conduct should be reconstructed as reducing the tax-exclusive price of the goods, not as forgoing output tax. Based on VAT's tax-exclusive nature, a buyer necessarily bears input tax when purchasing taxable items. Correspondingly, when the purchased items are used for taxable VAT activities subject to the general calculation method or for non-taxable activities as specifically provided by law, the input tax borne satisfies the substantive element for tax credit.

Resolves the issue of criminal liability characterization for truthful replacement invoicing.Where a taxpayer truly purchases taxable items but, due to failure to obtain lawful creditable documents, obtains truthful replacement invoices for credit, because the taxpayer has borne input tax in the actual procurement, the conduct does not constitute false crediting resulting in underpayment or non-payment of tax, much less fraudulent crediting of tax. The true source of tax loss can only be the seller's failure to file a tax return, not the buyer's obtaining of truthful replacement invoices. If the buyer's conduct were deemed to constitute fraudulent crediting or tax evasion through false input tax credits, and the seller's conduct deemed to constitute tax evasion through income concealment, this would amount to double counting of a single act of circumventing tax obligations. Therefore, for a buyer who obtains truthful replacement invoices, the buyer only disrupts the invoice management order and should not be convicted of the crime of issuing special VAT invoices for fraudulent purposes or the crime of tax evasion; rather, it should be held accountable for disrupting the invoice management order.

Resolves the source invoice problem for industries relying on natural persons as primary suppliers, effectively curbing invoice procurement fraud.Article 7 of the Implementing Regulations directly provides that "natural persons are small-scale taxpayers," and Article 35(1) of the Implementing Regulations provides that "where a natural person engages in a qualifying taxable transaction, the domestic entity paying the consideration shall be the withholding agent." This clarifies that the VAT collection method for natural persons' qualifying taxable transactions is withholding at source. When a buyer purchases from a natural person, bears and withholds the input tax, and obtains a tax payment certificate, it may use that as the basis for input tax credit, without needing to obtain replacement invoices from a third party as credit documents, thereby effectively reducing invoice procurement fraud (Luo Zhiheng et al., 2024).

II. More Refined Rules on Credit Restrictions

(1) Circumstances Where the Input Tax Credit Entitlement Should Be Restricted

For administrative convenience, taxpayers generally do not need to attribute the input tax they bear to the output tax of specific taxable transactions to which the purchased items are applied; rather, they may claim a blanket credit. That is, the input tax borne by the taxpayer during a statutory tax period may be credited against the output tax generated in that period. However, if the purchased taxable items are used for non-taxable transactions or tax-exempt items, since the goods or services cannot continue to appreciate in the next stage, or the state cannot participate in the distribution of the next stage's appreciation, the corresponding input tax must be transferred out, unless otherwise specifically provided. In addition, if the credit documents do not meet the requirements, or if the items are used for simplified method projects, the input tax must of course also be transferred out.

(2) Crude Credit Restriction Rules under the Old Law

Lack of the concept of non-taxable projects.The 2008 revision of the Provisional Regulations included a concept of "non-VAT taxable projects" in Article 10, and Article 23 of the Implementing Rules defined "non-VAT taxable projects" as "the provision of non-VAT taxable services, transfer of intangible assets, sale of real property, and construction-in-progress of real property," which mainly referred to items then subject to business tax. After the replacement of business tax with VAT, the Provisional Regulations deleted the term "non-VAT taxable projects," and the Measures likewise had no such concept. However, not all transactions are subject to VAT, such as transfers of equity, partnership interests, and creditor's rights, which all fall under non-taxable transactions for VAT purposes. Due to the legislative gap, taxpayers purchasing taxable items for use in these non-taxable projects did not need to transfer out input tax, but they did not meet the substantive element of the input tax credit entitlement. Without the transfer-out requirement, taxpayers engaged in non-taxable projects would obtain an excess credit compared to those engaged in taxable projects, violating tax neutrality.

Tax avoidance loopholes for mixed-use fixed assets, real property, and intangible assets.Article 27 of the Measures provided that input tax on fixed assets, real property, and intangible assets exclusively used for simplified-method projects, tax-exempt items, collective welfare, or personal consumption could not be credited. Based on this provision, for fixed assets, real property, and intangible assets exclusively used for taxable projects or used both for taxable projects and non-creditable projects, the full input tax could be credited. The difference in tax treatment among fixed assets, real property, and intangible assets left room for tax avoidance planning. For example, a taxpayer might acquire relevant assets actually used for non-taxable or tax-exempt projects but, through careful planning, arrange for a small portion of the use to be for taxable projects, thereby enabling full input tax credit.

Improper restriction of the credit entitlement through general taxpayer registration.General taxpayer registration was originally called general taxpayer qualification approval, which was not merely an administrative management measure but also had a qualification-granting character. Article 34 of the Implementing Rules provided that if sales exceeded the threshold but the taxpayer did not apply for general taxpayer recognition, the tax payable should be calculated at the applicable tax rate, with no credit for input tax and no use of special VAT invoices. Article 33 of the Measures similarly provided that those who should have applied for general taxpayer registration but failed to do so should have their tax payable calculated at the applicable tax rate, with no input tax credit and no use of special VAT invoices. Taking goods sales as an example, if sales exceed the threshold but general taxpayer registration is not completed, the tax payable changes from "sales ÷ (1+3%) × 3%" to "sales ÷ (1+13%) × 13%," a 3.9-fold increase, severely impairing taxpayer rights. Although theMeasures for the Administration of General VAT Taxpayer Registration(State Administration of Taxation Order No. 43) renamed general taxpayer qualification approval as general taxpayer registration, the legal consequences for failing to register despite exceeding the sales threshold remained unchanged, resulting in an improper restriction on the credit entitlement.

Failure to establish an effective settlement mechanism.If a taxpayer purchases taxable items for use both in taxable projects and in simplified-method or tax-exempt projects, and cannot accurately allocate the input tax between the different projects, the tax must be apportioned according to the proportion of sales of taxable projects to sales of simplified-method and tax-exempt projects, as required by law. As noted above, tax credits are blanket credits, not transaction-by-transaction matching of inputs to outputs. At the time of purchase, the input tax is fully credited, but the sales or revenue may be generated in later periods, requiring a post-event settlement of the credited input tax. Although Article 29 of the Measures provided for the possibility of settlement, it treated settlement as a power of the tax authority rather than an obligation of the taxpayer, and did not specify the timing of settlement, resulting in the settlement mechanism not being effectively utilized, with a large amount of input tax that should have been transferred out being excessively credited.

(3) The New Law's Credit Restriction Rules Fully Consider Administrative Efficiency and Taxpayer Rights Protection

Introduces the concept of non-taxable transactions.Article 22 of the Implementing Regulations introduces the concept of "non-taxable transactions," which covers all business activities other than taxable transactions (including deemed taxable transactions) under Articles 3 to 5 of the VAT Law. It further divides non-taxable transactions into creditable non-taxable transactions and "non-creditable non-taxable transactions." It clarifies that for non-taxable transactions that yield economic benefits, the corresponding input tax may not be credited except as otherwise specifically provided. For example, when a taxpayer engages in equity investment activities, both equity transfers and the receipt of dividends are not taxable items, and the input tax on legal services and accounting services purchased for these activities may not be credited. This design is more consistent with the principle of tax neutrality. For non-taxable transactions that do not yield economic benefits, or that yield economic benefits but are subject to special provisions, the corresponding input tax may still be credited.

Adds credit restrictions on fixed assets, real property, and intangible assets.Article 25 of the Implementing Regulations collectively refers to fixed assets, real property, and intangible assets as long-term assets, and provides that where long-term assets are used both for projects subject to the general calculation method and for non-creditable projects, they are deemed mixed-use long-term assets. For each mixed-use long-term asset, different credit rules apply based on the asset's original value: if the original value does not exceed RMB 5 million, the input tax may be fully credited; if the original value exceeds RMB 5 million, the input tax is fully credited at the time of acquisition, and during the mixed-use period, the non-creditable input tax is calculated based on the adjustment period and adjusted annually. This adjustment helps fill a gap in the legal framework and can effectively curb tax avoidance through mixed-use long-term assets.

Clarifies the legal nature of general taxpayer registration.The Implementing Regulations delete the provision on the legal consequences for failing to apply for registration, clarifying that a taxpayer whose sales exceed the threshold, even without registration, has the right to obtain special VAT invoices and claim input tax credits. Thus, the legal nature of general taxpayer registration is confirmed as an administrative management measure, without qualification-granting effect. TheAnnouncement of the State Administration of Taxation on Matters Concerning the Administration of General VAT Taxpayer Registration(State Administration of Taxation Announcement No. 2 of 2026) continues the term "general taxpayer registration," further clarifying its legal nature, and in Article 7 provides that where a taxpayer should have filed tax returns as a general taxpayer but actually filed as a small-scale taxpayer, for special VAT invoices obtained during the small-scale taxpayer filing period, the taxpayer may claim credit on a period-by-period basis. According to the State Administration of Taxation's interpretation, if the taxpayer did not obtain creditable documents in a timely manner at the time, it may request the seller to supply compliant credit documents retrospectively. Decoupling general taxpayer registration from the credit entitlement helps protect taxpayers' lawful rights and interests (Wang Jianping, 2025).

Establishes an effective settlement mechanism.Article 23 of the Implementing Regulations provides: "For purchased goods (excluding fixed assets) and services used for simplified-method projects, tax-exempt items, and non-creditable non-taxable transactions, where the non-creditable input tax cannot be accurately allocated, the non-creditable input tax for each period shall be calculated on a period-by-period basis based on the proportion of sales or revenue, and a full-year consolidated settlement shall be conducted during the tax filing period of January of the following year." Long-term mixed-use assets are subject to the annual adjustment rule and are not covered by this settlement. This provision clearly defines the taxpayer's settlement obligation and timing, establishing a highly operable input tax settlement system that compels the transfer-out of non-compliant input tax and further strengthens taxpayers' VAT compliance management responsibilities.

III. The Scope of Taxation for Cross-Border Transactions: Both Additions and Subtractions

(1) Basic Principles of Tax Jurisdiction over Cross-Border Transactions

The scope of taxation for cross-border transactions essentially involves the allocation of tax jurisdiction. Although the VAT tax base is the value added created by the industrial chain, the tax source comes from consumption, and the ultimate bearer of the tax is the final consumer; enterprises not bearing the tax is a fundamental principle. Protecting the tax jurisdiction of the consuming country is a principle recognized by the World Trade Organization. For cross-border goods transactions, consumption-based taxation is achieved through comprehensive export rebate and import taxation systems. For cross-border services and intangible assets, which do not involve customs supervision, implementing consumption-based taxation is more complex and often requires a proxy indicator to assist in determining the place of consumption.

(2) Deviation from the Consumption Principle under the Old Law and Practice

According to Article 1 of the Provisional Regulations, the sale of services and intangible assets within the territory of China falls within the scope of VAT taxation. The scope of "sales within the territory" was primarily clarified through the Measures. Under Article 12 of the Measures, where "the seller or the buyer is within the territory" for services (except real property leasing) or intangible assets (except natural resource usage rights), it constitutes a domestic sale. For cases where the seller is outside the territory and the buyer is within (i.e., imports of services and intangible assets), Article 13 of the Measures listed four situations not constituting domestic sales, including: (1) services entirely performed outside the territory; (2) intangible assets entirely used outside the territory; (3) leasing of tangible movable property entirely used outside the territory; and (4) a catch-all provision. For cases where the seller is within and the buyer is outside (i.e., exports of services and intangible assets), theProvisions on Applying Zero Rate and Tax Exemption Policies for Cross-Border Taxable Activities(Cai Shui [2016] No. 36) specified the scope eligible for the zero rate.

Overall, for imports of services and intangible assets, the old law used "whether the buyer is within the territory" as the basic principle for allocating taxing rights, which can be understood as the customer-location principle. However, customer location is generally considered a proxy for the place of consumption, and using it as a general principle is not entirely reasonable. Furthermore, the specific meanings of "entirely performed outside the territory" and "entirely used outside the territory" lacked clear interpretation. Some tax authorities considered "business entirely performed outside the territory" to mean that all elements constituting the sales activity were outside the territory, including: (1) the seller providing services outside; (2) the buyer accepting services outside; and (3) the buyer's payment address, telephone, bank location, place of service, etc., all being outside the territory. In my view, the payment address, telephone, and bank location have no substantial connection to the place of consumption, and using them to allocate taxing rights is also unreasonable. For exports of services and intangible assets, the zero rate applies only to the thirteen categories specifically enumerated by law; more than twenty categories, including transfers of intangible assets (excluding technology), are subject to tax exemption. Among these, export taxation is essentially source-based taxation, and while export tax exemption provides a tax preference to exporting enterprises, the corresponding input tax is not deductible, meaning exporting enterprises still bear the tax burden incurred in the domestic circulation stage, deviating from the consumption-based taxation principle.

(3) The New Law's Establishment of and Impact on the Consumption Principle

Article 4 of the VAT Law establishes the criteria for determining taxable transactions of services and intangible assets within the territory, specifically: for sales of financial products, the financial product is issued within the territory, or the seller is a domestic entity; for other services and intangible assets (excluding real property leasing, transfer of natural resource usage rights, and sales of financial products), the service or intangible asset is consumed within the territory, or the seller is a domestic entity. "Service or intangible asset consumed within the territory" clarifies the consumption-based taxation principle. Article 4 of the Implementing Regulations further refines "consumed within the territory," including: services and intangible assets sold by an overseas entity to a domestic entity, except for services consumed on-site outside the territory; services and intangible assets sold by an overseas entity that are directly related to goods, real property, or natural resources within the territory; and other circumstances prescribed by the finance and tax authorities of the State Council. The new law's provisions mainly bring the following changes and impacts.

1. Changes and Impacts on the Scope of Taxation for Cross-Border Transactions of Financial Products.

According to the annotation to services, intangible assets, and real property attached to the Measures, the transfer of financial products is a type of financial service; if either the seller or the buyer is within the territory, taxation may apply, unless the seller is outside, the buyer is inside, and the transfer of financial products entirely occurs outside. Under the VAT Law, the buyer's location is no longer a basis for determining the scope of taxation; instead, the place of issuance is used. Where an overseas entity sells a financial product issued within the territory to another overseas entity, it changes from non-taxable to taxable.

Overall, the transfer of financial products differs in nature from general financial services; the former is more akin to asset transfer, while the latter is more service-oriented. Separating the transfer of financial products from services and providing a separate rule for the scope of taxation is reasonable. Financial products are mostly traded on regulated exchanges, subject to the financial supervision of the issuing jurisdiction, and have an inseparable connection with the place of issuance. Using the place of issuance as the place of consumption for the transfer of financial products and granting tax jurisdiction to the issuing jurisdiction is a practical arrangement. However, three questions may arise: first, from an administrative convenience perspective, for financial products issued within the territory where both transacting parties are overseas, should overseas investors be required to register with domestic tax authorities, or should the domestic securities depository and clearing institution act as an agent for tax filing? Second, using the seller's location as the place of taxation without providing a zero rate may result in source-based taxation, reducing the efficiency of the consumption principle. Third, granting tax jurisdiction to both the seller's location and the place of issuance may lead to double taxation and cross-border tax disputes. I suggest adding a zero-rate provision for domestic entities selling financial products to overseas entities, which would both align with the consumption principle, avoid double taxation, and attract high-quality foreign investment to the domestic capital market.

2. Changes and Impacts on the Scope of Taxation for Imports of Services and Intangible Assets.

First, for service imports, the customer's location is generally used as the place of consumption, while excluding domestic taxing rights for on-site consumption outside the territory. The concept of on-site consumption references the OECD's concept of "on-the-spot supplies." "On-the-spot consumption outside the territory" emphasizes that the place of service provision and the place of consumption are consistent and both outside the territory (Gong Ting, 2021), without requiring that transactional elements such as payment address also be outside, thereby resolving disputes over the determination of "entirely occurring outside the territory." For example, a domestic construction enterprise purchases catering services from an overseas catering enterprise for its overseas employees and settles the payment using a domestic account. Under previous practice, because the payment address was within the territory, there was a risk that the tax authority might determine that it did not qualify as "entirely occurring outside the territory." However, under the Implementing Regulations, this service constitutes on-site consumption outside the territory and is not taxable.

Second, for intangible asset imports, the "on-site consumption outside the territory" exception applies only to services, not intangible assets. The Implementing Regulations provide that any sale of intangible assets by an overseas entity to a domestic entity constitutes a taxable activity within the territory, deleting the exception under Article 13 of the Measures for "intangible assets entirely used outside the territory," thereby expanding the scope of taxation. For example, a domestic film company purchases the copyright of a bestselling novel from an overseas enterprise, with the license restricted to use outside the territory. The domestic film company then commissions overseas screenwriters and directors to adapt the novel into a film outside the territory and release it overseas. Since the copyright is entirely used outside the territory, under the old law it would not be taxable. However, under the Implementing Regulations, because the buyer is within the territory, the overseas enterprise must pay VAT in China on the copyright licensing transaction. This provision effectively equates customer location with the place of consumption, which in certain cases may extend beyond the consumption principle. Since Article 4(3) of the Implementing Regulations authorizes the finance and tax authorities of the State Council to provide for "services and intangible assets consumed within the territory," I suggest that the relevant authorities use this delegated legislative authority to exclude from the scope of taxation cases where an overseas entity sells intangible assets to a domestic entity but the intangible assets are entirely used outside the territory.

Third, for services and intangible assets, the Implementing Regulations provide that as long as the service or intangible asset is directly related to goods, real property, or natural resources within the territory, it falls within the domestic scope of taxation. This rule does not emphasize the customer's location, so even where an overseas entity sells services or intangible assets to another overseas entity, if the service or intangible asset is directly related to domestic goods, real property, or natural resources, it will be brought within the scope of taxation. This new adjustment constitutes a legitimate expansion of tax jurisdiction, but the scope of "directly related" needs further clarification. "Directly related" should focus on the purpose of the service or intangible asset. If the ultimate purpose of the service or intangible asset is for domestic goods, real property, or natural resources, then even if the place of provision and place of acceptance are both outside the territory, the consumption is dependent on the existence or consumption of domestic goods, real property, or natural resources, and the territory can be considered the final place of consumption; taxation within the territory is consistent with tax neutrality. For example, if overseas Enterprise A sells architectural design services to overseas Enterprise B, and the design services are for the renovation of a specific building in China, because the ultimate purpose is directly related to Chinese real property, taxation in China should apply.

3. Continuation and Impact of the Scope of Taxation for Exports of Services and Intangible Assets.

For exports of services and intangible assets, Article 10(5) of the VAT Law provides that domestic entities' cross-border sales of services and intangible assets within the scope prescribed by the State Council are subject to a zero rate, and Article 9 of the Implementing Regulations further specifies the specific scope of the zero rate. Apart from some adjustments in wording, the scope is basically consistent with that enumerated in theProvisions on Applying Zero Rate and Tax Exemption Policies for Cross-Border Taxable Activities(Cai Shui [2016] No. 36). However, the current zero-rate scope remains relatively narrow, which is not conducive to export enterprises' participation in international market competition. Therefore, I suggest making full use of the delegated legislative authority for the zero rate to further expand the pilot scope of the zero rate for exports of services and intangible assets, so as to promote high-quality foreign trade development and expand high-level opening-up.

IV. The General Calculation Method Becomes the Foundational Tax Calculation Method

(1) The Significance of the General Calculation Method in the VAT System

Tax crediting is the fundamental mechanism of VAT, and only by constructing a benchmark tax system based on the principle of input tax crediting can tax neutrality be achieved (Ye Shan, 2020). The simplified calculation method applies only to small-scale taxpayers and certain specific taxable transactions of general taxpayers; it is inherently unfair to downstream general taxpayers. Therefore, the simplified method can only serve as an alternative taxation approach—a compromise made in response to differences in business scale, accounting capability, and tax compliance capacity among market entities. Its scope of application should be as limited as possible, with emphasis on the foundational status of the general calculation method and encouragement for taxpayers to opt for the general method. If the general method and the simplified method are placed on an equal footing, or if the simplified method is extensively applied, tax fairness will be undermined.

(2) Deficiencies in the Old Law's Design of Tax Calculation Rules

Failure to establish the foundational status of the general calculation method.Article 11 of the Provisional Regulations provided that small-scale taxpayers adopt the simplified calculation method based on sales and the levy rate; Article 4 provided that, except for the circumstances in Article 11, the tax payable is the balance of output tax after deducting input tax for the period. These provisions did not distinguish between the primary and supplementary roles of the two methods, placing the general and simplified methods on an equal footing, without establishing the foundational status of the general method (Jiang Mingyao, 2022).

Inappropriate provisions on the effective date of general taxpayer status.Article 9 of theMeasures for the Administration of General VAT Taxpayer Registration(State Administration of Taxation Order No. 43) provided that from the effective date of general taxpayer status, the taxpayer calculates tax payable according to the general calculation method. The effective date is the 1st day of the current month or the following month, as chosen by the taxpayer at the time of registration. However, Articles 34 of the Implementing Rules and 33 of the Measures both provided that as long as sales exceed the small-scale taxpayer threshold, even without registration, the tax payable must be calculated at the VAT rate. There is an obvious internal contradiction. Linking the general calculation method to general taxpayer registration also lacks institutional rationality.

Unfairness in the rule that audit-discovered supplemental sales do not affect the tax period and therefore do not adjust the calculation method.TheAnnouncement of the State Administration of Taxation on Several Matters Concerning the Administration of General VAT Taxpayer Registration(State Administration of Taxation Announcement No. 6 of 2018) provided that "audit-discovered supplemental sales" are included in the sales of the period in which the supplemental tax is filed, not in the sales of the tax period to which they belong. On the one hand, late payment penalties on supplemental tax amounts begin from the tax period to which they belong, yet the supplemental sales are not included in that period's sales—the policy is internally inconsistent. On the other hand, where a small-scale taxpayer concealed sales in previous years and the cumulative sales have crossed the threshold, it still applies the simplified method without retroactive adjustment, which is manifestly unfair compared to taxpayers who filed truthfully and paid tax in full.

(3) The New Law's Adjustments to and Impacts on Tax Calculation Rules

Establishes the foundational status of the general calculation method.Article 8 of the VAT Law provides that taxpayers shall apply the general calculation method for taxable transactions, unless otherwise provided; small-scale taxpayers may apply the simplified calculation method. This clarifies the foundational role of the general method and the supplementary role of the simplified method, aligning with the tax neutrality principle. Compared with the old law, the new law explicitly states that small-scale taxpayersmayapply the simplified method, rather thanmust, and may choose the general method if they meet the conditions. This adjustment further weakens the priority of the simplified method and encourages small-scale taxpayers to improve their accounting systems and gradually transition to the general method.

Clarifies that taxpayers exceeding the annual sales threshold automatically apply the general calculation method from the relevant period.Article 36(1) of the Implementing Regulations provides that where the annual VAT taxable sales exceed the small-scale taxpayer threshold, the taxpayer shall calculate and pay VAT using the general calculation method from the period in which the threshold is exceeded. Article 6 of State Administration of Taxation Announcement No. 2 of 2026 also provides that, except in special circumstances, where a taxpayer's annual VAT taxable sales exceed the prescribed threshold, the effective date of general taxpayer status is the 1st day of the period in which the threshold is exceeded. This decouples general taxpayer registration from the application of the general calculation method, enhancing tax fairness.

Audit-discovered supplemental sales retroactively affecting the tax period's calculation method helps combat tax evasion.Article 3 of State Administration of Taxation Announcement No. 2 of 2026 provides that sales adjustments due to taxpayers' supplementary or corrected filings, risk control verification, or audit discoveries shall be attributed to the tax period in which the tax liability arose. Article 7 clarifies that for taxpayers who have filed as small-scale taxpayers from the effective date of general taxpayer status, they shall file corrected returns on a period-by-period basis as general taxpayers. Accordingly, if a tax audit reveals underpayment by a small-scale taxpayer, and the corresponding sales, when attributed to the underpayment period, cause the sales to exceed the small-scale taxpayer threshold, the general calculation method shall automatically apply from the 1st day of that period. From the underpayment period to the audit period, the taxpayer must retroactively adjust to the general method on a period-by-period basis. In addition, Article 11 of State Administration of Taxation Announcement No. 2 of 2026 clarifies the retroactivity issue: for small-scale taxpayers with underpayments in years before 2026, the effective date of general taxpayer status may not be earlier than January 1, 2026. This rule helps deter tax evasion and strengthens taxpayers' awareness of tax law compliance.

References

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Authors' affiliation: Beijing Hua Tax Law Firm