On 16 November 2011, the Chinese Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly issued Caishui  No. 110 (Circular 110) and Caishui  No. 111 (Circular 111) which set out the details of the Shanghai VAT pilot arrangements (VAT Pilot rules). Circular 110 contains the general framework of the VAT pilot while Circular 111 details the implementation rules that are specifically applicable to Shanghai.
Circular 110, Notice for the Introduction of the Pilot Scheme to Convert Business Tax to VAT, outlines the general principles for the overall VAT reform pilot program in China (although no date for the full reform pilot program is mentioned). The Circular clarifies that the VAT reform pilot program will be carried out in two phases:
Phase 1: The initial pilot applicable to specific sectors in Shanghai; and
Phase 2: Roll out of the pilot to other regions, or nationwide, for specified sectors when conditions permit.
Once the two pilot programs are completed, the VAT reform is expected to be rolled out nationwide for all service sectors the third and final phase of the reform.
Circular 110 states the general principles of the overall reform pilot program, which include:
(1) Confirmation that the pilot program will commence on 1 January 2012 and, when conditions permit, it is expected that the VAT reform will be expanded nationwide. Applicable VAT rates:
Leasing of moveable and tangible goods: 17%;
Provision of transportation and construction services: 11%; and
Provision of other specified modern services: 6%.
(2) Financial and insurance services, as well as services provided to consumers for their daily needs, generally will be taxed using the simplified taxing method, while other service sectors will be taxed using the ordinary taxing method. (Under the simplified taxing method, tax due is calculated by multiplying the sales amount by the VAT levying rate (3%), but input VAT is not recoverable. By contrast, under the ordinary taxing method, the standard VAT rate will apply, and input VAT is creditable against output VAT.)
(3) Services provided from overseas and received in China will be subject to VAT at the above rates. The provision of services from China to overseas customers will be exempt or zero rated for VAT purposes.
(4) With respect to cross-region taxation, taxpayers covered by the pilot program must pay VAT at the location where their organization is situated. BT paid in other regions can be deducted when calculating the VAT due. Taxpayers that do not fall within the scope of the pilot program will continue to pay BT even if they are operating in the pilot regions.