Two concepts determine the tax rate

In VAT practice, the tax rate issues that most often give rise to disputes are not usually due to unclear policies, but rather to uncertainty regarding the characterization of transactions.

• A taxable transaction involves multiple tax rates(Mixed Sales): Apply the tax rate corresponding to the primary business activity of the taxable transaction.
• Two or more taxable transactions subject to different tax rates or collection rates(Multiple Lines of Business): Sales subject to different tax rates and collection rates must be accounted for separately; if they are not accounted for separately, the higher tax rate shall apply.

The “Value-Added Tax Law of the People’s Republic of China” will take effect on January 1, 2026. The treatment principles outlined above continue the long-standing practical approach but are now expressed more clearly. Application of Specific ProvisionsThe legal text and the interpretation of the competent tax authority shall prevail.The

Key Determination: One Transaction or Two Transactions

The key to determining this is not how many items are listed in the contract, but whether there is a relationship between these performances.Master-Slave Relationships and Indivisibility::

• If goods and services are mutually contingent and together constitute a single economic purpose, they are generally considered a ”single transaction” and taxed at the rate applicable to the principal business activity. For example, the sale of equipment that includes installation and commissioning; in this case, the installation is an integral part of the delivery of the equipment.
• If each payment can exist independently, be priced separately, and be fulfilled separately, it constitutes ”two or more taxable transactions” and should be accounted for separately. For example, when equipment is sold and an annual maintenance service contract is entered into separately, the maintenance service can be provided independently.

There is no single formula for making this determination; it must be assessed comprehensively, taking into account the commercial substance, pricing methods, performance obligations, and industry practices.

Three Typical Scenarios Involving Cross-Border E-Commerce and Equipment Manufacturers

• Equipment + Installation + Training. If the total contract price is a lump sum and cannot be broken down, the applicable tax rate for the primary service (goods) is generally applied; if training and maintenance are covered by separate contracts and billed separately, they may be accounted for separately.
• Online Store + Management Services. If the operational service fees and advance advertising expenses charged by domestic service providers to cross-border sellers cannot be distinguished, the higher tax rate may apply. It is recommended to list advance payments and service fees separately in the contract.
• Goods + Logistics + Insurance. Whether the value of goods and freight and insurance charges are combined for tax purposes in export transactions depends on the terms of the transaction (e.g., FOB, CIF) and the method of invoicing; these must be consistent in both the contract and the customs declaration.

A Three-Step Approach to Amending Contracts and Invoices

Step 1: Break it down at the contract level. Break down payments that can stand alone into separate clauses or separate service agreements, clearly specifying the respective amounts, performance deadlines, and acceptance criteria. The price provisions of the contract serve as primary evidence for tax classification.

Step 2: Categorize by accounting level. Separate accounting is not merely a matter of ”issuing two invoices”; it also requires that accounting entries, revenue recognition, and cost allocation correspond with one another. If only a single revenue entry appears on the books, splitting the invoice could actually become a risk factor.

Step 3: Match at the invoice level. The description of goods or taxable services and the tax rate on invoices must be consistent with those in the contract and the accounting records. Deliberately splitting a contract to qualify for a lower tax rate—even if the commercial substance remains unchanged—constitutes a typical tax risk and is likely to be deemed to lack a reasonable commercial purpose.

A Practical Reminder

The cost of facing a higher applicable tax rate is typically far lower than the cost of paying back taxes plus late payment penalties and credit score deductions. When the boundaries are unclear, rather than taking a chance on an aggressive allocation plan, it is better to clarify the transaction structure through genuine business arrangements—by truly separating the services, pricing them independently, and delivering them separately—so that the tax rate will naturally fall within a reasonable range.

Qicaiying can assist companies in reviewing the consistency between contract pricing terms and tax treatment, and in conducting a diagnosis of VAT rate applicability and developing corrective action plans in accordance with the Value-Added Tax Law; specific details are subject to the provisions of the relevant laws and regulations and the interpretations of the competent tax authorities.