Effective September 1, 2021, the new Urban Maintenance and Construction Tax Law (UMCT), as well as three supporting regulations, incorporates some important changes, including the cancelation of the special purpose of the UMCT, clarification of the UMCT’s taxation basis and the rules for deciding the location of the taxpayer. Before the approval of the UMCT Law, the collection and administration of UMCT in China was governed by provisional rules issued in 1985, together with various supplementary tax circulars. The UMCT is one of the major local taxes and surcharges which, together with the Education Surcharge and the Local Education Surcharge, are levied based on indirect taxes payable, including VAT (value added tax) and CT (consumption tax). VAT is levied on organizations and individuals engaging in sale of goods, providing processing, repair, and assembly services, sale of services, intangible assets, and immovables, and importation of goods. Consumption tax is levied on manufacture, import, and sale of certain products that are either luxury and financially significant or harmful to the health, social order, and the environment, as indicated in the CT taxable items list. All entities or individuals subject to VAT and CT must pay UMCT in accordance with laws and regulations. For more than three decades, the UMCT provisional rules had been in place. However, since then, there have been important updates to the indirect tax system in China, including the VAT reform which expanded the taxable scope to cover a wide range of services that were originally not subject to VAT, and the rolling out of refunds of excess input VAT credits to all general VAT taxpayers. The Ministry of Finance (MOF) and the State Taxation Administration (STA) also issued STA Announcement (2021) 26, MOF and STA Announcement (2021) 27 and MOF and STA Announcement (2021) 28 ("3 Announcements”) to further explain and supplement the UMCT Law. The enactment of the UMCT Law and 3 Announcements consolidated some key UMCT treatments that were previously discussed in the form of supplementary tax circulars, or not clarified. One of the most relevant changes enacted by the UMCT Law is the confirmation that UMCT is not levied on the VAT or CT paid in respect of the import of goods and provision of services or intangible assets by overseas entities or individuals to Chinese businesses or consumers. Before the UMCT Law, it was clear that UMCT was not levied on the import of goods. 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. This update reduces the tax costs associated with the receipt of cross-border services by domestic businesses and eliminates the need for domestic businesses and overseas service providers to negotiate which party should commercially bear the relevant surcharges. The above exclusion does not cover the sale of immovable properties, and therefore it is expected that UMCT remains payable on VAT incurred because of any transfer or sale of immovable properties in China by overseas entities or individuals. Under the UMCT Law, the UMCT tax rates remain the same as before: 7 percent for taxpayers in a city; 5 percent for taxpayers in a county or town; and 1 percent for taxpayers in a place other than a city, county, or town. The surtaxes in the urban area will remain at 12 percent of the turnover taxes, with UMCT charged at seven percent, ES at three percent, and LES at two percent. The UMCT Law includes new rules on deciding the location of a taxpayer, stipulating that the location is the taxpayer’s address, or any other place related to the taxpayer’s production and business activities. The goal of establishing the location of taxpayers is to determine the specific applicable tax rate of UMCT, rather than to determine the location of tax payment. For example, the location of offshore oil and gas exploration and development is offshore, not belonging to cities, counties, or towns, and the one percent tax rate is applicable, but the location of tax payment is not offshore. In addition, the UMCT Law grants local governments (local province, autonomous region, or centrally administered municipality) certain authority in determining the specific location of the taxpayer, in order to avoid the universal “taxpayer location” standard that could unreasonably change the tax rates and tax burden of the taxpayers. The UMCT tax base is the amount of VAT and CT actually paid by taxpayers. The new UMCT Law establishes that the amount of tax refunded for the end-of-period VAT credits shall be deducted from the calculation basis of the UMCT. End-of-period VAT credits appear when the input VAT outnumbers the output VAT. The STA Announcement No.26 makes clear that the amount of tax refunded for the end-of-period VAT credits can only be deducted from the UMCT calculation basis when the corresponding VAT is determined in accordance with the general VAT calculation method. The balance not fully deducted in the current period will get deducted in the subsequent tax return period, according to relevant provisions. For imported goods or labor services, services, or intangible assets sold within the territory of China by overseas entities and individuals, the withholding tax rate will be reduced from 6.72 percent to six percent, with the 12 percent surtaxes no longer imposed. This will save taxpayers a lot of money in large transactions. STA Announcement No.28 clarifies that the amount of VAT and CT actually paid refers to the amount of the VAT and CT (excluding the VAT and CT paid due to import of goods or sale of labor services, services, and intangible assets within the territory by overseas entities and individuals) that shall be paid by a taxpayer as calculated in accordance with the relevant laws and regulations, plus VAT exempt-credit amount, and deducting the amount of the VAT and CT directly exempted or reduced and the amount of tax refunded for the end-of-period VAT credits. An ‘Exempt-credit tax amount’ is an amount that generally exists for VAT taxpayers conducting export manufacturing businesses or businesses that carry out exports of services, which are subject to an ‘Exempt-Credit-Refund’ VAT treatment. 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 said that such amounts form part of the UMCT taxable basis for an export manufacturing business, according to Circular No. 25. However, it as was less clear on whether such amounts incurred by a business carrying out exports of services forms part of the UMCT taxable basis. Before the effect of the UMCT Law, local practices varied in this regard. MOF and STA Announcement 28 and STA Announcement 26, now make clear that the ‘exempt-credit tax amount’ should form part of the UMCT taxable basis. In a practical sense, this increases the local tax costs associated with exports of services and intangible assets. 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 No. 80. This position remains the same after the effect of UMCT Law. Previously, the UMCT was levied for special purpose according to relevant regulations. For example, the repealed UMCT Interim Regulations stipulated that UMCT was levied for the purpose of strengthening urban maintenance and construction and expanding and stabilizing the sources of funds for urban maintenance and construction. With the continuous reform of the budget system, UMCT revenue has been incorporated into the general public budget since 2016, and no special purpose has been designated ever since. While the UMCT provisional rules have now been replaced with the UMCT Law, there is not a similar change in respect of the other two major surcharges in China, the Education Surcharge and the Local Education Surcharge. In this regard, the MOF and STA Announcement 28 has clarified that the calculation of the taxable basis of Education Surcharge and Local Education Surcharge should be consistent with that of UMCT. Since 2015, China has accelerated the process of turning tax regulations into laws to improve policies and ensure the efficiency of tax administrations. This is an ongoing process that foreign professionals should be aware of and should keep themselves well informed about developments in China’s tax laws.