Tax News Flash: New Rules for Input VAT Deduction on Futures Transactions

I. Physical Settlement vs. Non‑Physical Settlement: Differences in Deduction Treatment

• Physical settlement: Subject to the VAT provisions applicable to the sale of goods. Input VAT attributable to relevant taxable transactions may be deducted in accordance with law where deduction conditions are satisfied.
• Non‑physical settlement transactions: Where commodity futures positions are closed out or offset without physical delivery, such transactions constitute non‑taxable transactions with non‑deductible input VAT as specified in Announcement No. 25. Input VAT directly attributable to such transactions is non‑deductible.
• Shared operating expenses: For purchased goods (excluding fixed assets) and services that serve both taxable sales of goods and the aforesaid non‑deductible non‑taxable transactions, and whose usage cannot be reasonably segregated, their input VAT shall be allocated pursuant to Announcement No. 13.

II. Apportionment of Shared Input VAT by Ratio

Pursuant to Item (4) of Paragraph 1 of Announcement No. 13, where a general VAT taxpayer purchases goods (excluding fixed assets) and services that are concurrently used for simple tax calculation items, tax-exempt items, non-deductible non-taxable transactions, etc., and the non-deductible portion of input VAT cannot be segregated, such input VAT shall be apportioned in accordance with the provisions.

Non-deductible input VAT for the current period = Total unsegregated input VAT for the current period × Apportionment ratio

Per the current guidance agreed with the competent tax authorities, under the simplified scenario where the enterprise only conducts commodity futures transactions under general tax method, i.e., physically settled and non-physically settled commodity futures, the calculation shall be performed on a monthly basis:

Monthly apportionment ratio = Monthly gains from non-physically settled futures transactions ÷ (Monthly taxable sales from physically settled futures + Monthly gains from non-physically settled futures transactions)

The aforesaid method for calculating monthly gains represents the current administrative practice agreed with the competent tax authorities, rather than a specific, explicit requirement on the calculation of futures gains under Announcement No.13. If the enterprise has other taxable sales, simple tax calculation businesses, tax-exempt businesses or other non-deductible non-taxable transactions, the numerator and denominator shall be adjusted following the full formula set out in Announcement No.13. The treatment for loss-making months, negative gains and offsetting of profits and losses across contracts is recommended to be separately confirmed.

III. Apportionment Calculation Example

Assume that a bulk commodity trading enterprise records monthly taxable sales from physically settled futures of RMB 100 million, and monthly gains from non-physically settled commodity futures transactions of RMB 20 million. The input VAT on shared expenses with undetermined usage amounts to RMB 600,000, and there are no other businesses to be included in the apportionment formula. Calculated under the current monthly guidance agreed with the competent tax authorities:

Monthly non-deductible ratio = 20,000,000 ÷ (100,000,000 + 20,000,000) = 16.67%

Monthly non-deductible input VAT = RMB 600,000 × 16.67% ≈ RMB 100,000

The remaining shared input VAT for the month amounts to approximately RMB 500,000, which may be deducted provided other deduction conditions are met.

This example adopts monthly gains from non-physically settled futures transactions as the apportionment base to illustrate the calculation method under the agreed guidance. In case of monthly losses, negative gains or cross-period profit/loss, the treatment shall follow the specific calculation method confirmed with the competent tax authorities.

IV. Definition of Monthly Gains: Status of Discussions with Tax Authorities

Per the guidance agreed with the competent tax authorities to date, the apportionment base for physically settled futures is the monthly taxable sales amount, while that for non-physically settled futures transactions is the monthly realized gains. The two bases are used to apportion shared input VAT that cannot be directly attributed. It should be emphasized that Announcement No. 13 sets out the apportionment framework but does not separately specify the accounting treatment for monthly futures gains, losses and offsetting of profits and losses across contracts. Accordingly, enterprises shall retain communication records, transaction ledgers and calculation worksheets, and confirm the scope for determining monthly gains.

For hedging transactions, enterprises also need to distinguish between the direct use and shared use of relevant expenses. It shall not be automatically assumed that all input VAT is deductible merely because the transaction is entered into for risk hedging purposes.

V. Effective Date, Historical Review and Input VAT Reversal

Historical period review: Enterprises shall review input VAT deducted in returns from 1 January 2026 up to the present. By reference to the implementation and transitional provisions of Announcements No.13 and No.25, the nature of actual transactions and the enforcement practice of the competent tax authorities, enterprises shall verify whether there exists input VAT directly attributable to non-physically settled commodity futures transactions, or input VAT that ought to have been apportioned but was not. Any portion verified to be non-compliant with deduction rules shall be subject to input VAT reversal in accordance with law. For amounts relating to previously filed tax periods, enterprises shall assess whether amended or adjusted returns are required under applicable provisions.

Monthly deduction administration: After enterprises confirm and tick input VAT for deduction each month, they shall still calculate the non-deductible amount based on the actual usage, monthly taxable sales from physical settlement and monthly gains from non-physically settled futures transactions. Input VAT that has been ticked and declared for deduction but fails to meet deduction conditions shall be reversed in the applicable filing period pursuant to law. Confirmation via the ticking system alone does not constitute grounds for allowable deduction.

Enterprises are advised to segregate monthly taxable sales from physically settled futures and gains from non-physically settled futures transactions, identify directly attributable expenses and unsegregable shared expenses, prepare monthly apportionment working papers, and preserve supporting documentation of communications with the competent tax authorities. For loss-making months, gain recognition and outstanding historical items, review is recommended in accordance with specific guidance from the competent tax authorities.

For hedging transactions, enterprises shall also distinguish between the direct use and shared use of relevant expenses. It shall not be automatically assumed that all input VAT is deductible merely because the transaction is entered into for risk hedging purposes.

VI. Legal References

1.Announcement of the Ministry of Finance and the State Taxation Administration on Matters Concerning Input VAT Deduction and Other Relevant Issues (Announcement No. 13 of 2026 issued by the Ministry of Finance and the State Taxation Administration), Item (4) of Paragraph 1.

2.Announcement of the Ministry of Finance and the State Taxation Administration on Clarifying VAT Matters Including Non-Taxable Transactions (Announcement No. 25 of 2026 issued by the Ministry of Finance and the State Taxation Administration), Item (4) of Paragraph 2 and Paragraph 11.

3.Implementation Regulations of the Value-Added Tax Law of the People’s Republic of China, Article 22, et seq.

This article is for general tax information exchange only and does not constitute formal tax advice for any specific transaction.