In the recent “Notice Regarding the Inclusion of Railway Transportation and Postal Service Industries under ‘Value-Added Tax (VAT) in lieu of Business Tax’ Pilot Reform (Caishui  No. 106, hereinafter referred to as ‘Circular 106′)” jointly released by the Ministry of Finance (MoF) and the State Administration of Taxation (SAT), it specified that offshore outsourcing services in China will be VAT exempted from January 1, 2014, to December 31, 2018, as a pilot transitional policy during ongoing VAT reform.
Under Circular 106 offshore outsourcing services refer to ITO (Information Technology Outsourcing), BPO (Business Process Outsourcing) and KPO (Knowledge Process Outsourcing) services provided by a pilot taxpayer of the VAT reform to a foreign company under an entrustment contract.
The “Circular on the Tax Collection Policies for the Nationwide Adoption of the Business Tax to Value-Added Tax Pilot Conversion in the Transportation Industry and Certain Modern Service Industries (caishui  No. 37, hereinafter referred to as ‘Circular 37′)” came into effective on August 1 this year and is the current major guideline for enforcing the VAT reform. Circular 37 allowed VAT exemption for offshore outsourcing services provided by companies located in certain cities of China and is scheduled to expire at the end of this year. Circular 106 expands this exemption to all pilot taxpayers and provides the detailed scope of eligible services. It will be effective starting next year and will abolish the provisions of Circular 37.
Greater detail of the eligible services for VAT exemption can be found below:
1) Software research, development and outsourcing:
a) Software research and development services
- The development of customized software, embedded software, packaged software, system software, and software testing services provided to departments and enterprises of/in finance, government, education, manufacturing, retail, services, energy, logistics, transport, media, telecommunication, public utilities and medical and public health for the operation, production, supply chain management, customer relationship management, human resource and financial management, auxiliary design in computers, engineering, and other activities of clients.
b) Technical software services
- Technical services such as software consulting, maintenance, training and testing.
2) Outsourcing of research and development services in information technology:
a) Design of integrated circuits and electronic circuits
- The design and provision of relevant technical support services for integrated circuit and electronic circuit products.
b) Platform testing
- Platform testing for the development and application of software, integrated circuits and electronic circuits.
3) Outsourcing of the operation and maintenance of information systems:
a) Operation and maintenance services of information systems
- Internal information system integration, network management, desktop management and maintenance services for clients.
- Information system application services such as information engineering, geographic information system and remote maintenance.
b) Fundamental information technology services
- Fundamental information technology services such as integration of management platforms for fundamental information technology, IT infrastructure management, data centers, hosting centers, security services and communication services.
1) Process-design services for enterprises:
- Process design for enterprises in internal management and business operation.
2) Internal management services for enterprises:
- Services in backstage management, human resource management, financial, audit and tax management, financial payment, data analysis of medical and other internal management operation, data mining, data management, data usage, and special data processing, analysis and integration.
3) Enterprise operation services:
- Services in technology research and development, and client analysis and database management for enterprise operations, sales, after-sale service of products, mainly including financial operations, government affairs and educational operations, manufacturing operations, life sciences, retail and wholesale, and transportation operations, public health operations, communication and public utilities operations, call center operations and E-commerce platforms.
4) Enterprise supply chain management services:
- Overall solution design and database services for client’s procurement and logistics needs.
- Research services on intellectual property rights, the research, development, and testing of pharmaceutical and biological technology, the research and development of product technology, industrial design, analytics and data mining, design and development of animation and online games, the research and development of educational courseware, and engineering design.