China and the United States yesterday signed a Memorandum of Understanding on the value-added tax (VAT) on semiconductors, formally putting an end to the first complaint China faced at the World Trade Organization (WTO).

A statement by the Ministry of Commerce said China's Ambassador to the WTO Sun Zhenyu and US Ambassador Linnet Deily inked the agreement in Geneva, the headquarters of the world trade body, and notified the WTO of the result.

The ministry announced on July 10 that concessions had been reached on the dispute but no details were released.

Under the agreement, China will adjust its VAT rebate policy on semiconductors made in China before November 1 this year and implement it by April next year.

China also promised to drop the tax break given to semiconductors which are designed locally, produced outside and then imported into China.

The change should be officially announced before September 1 this year and take effect before October 1.

In turn, the United States will withdraw the complaint from the WTO. The complaint, filed on March 18, was the first against China since it joined the WTO in late 2001.

Under WTO rules for resolving disputes, the US and China must hold consultations for at least two months before a panel will begin to adjudicate the complaint.

According to the statement from the Ministry of Commerce, the two sides held four rounds of consultations on April 27, May 27, June 15 and July 1 to 2. The European Union, Japan and Mexico joined the talks as third parties.

Despite the agreement, the ministry still claimed in its previous statement that the US complaint, was "incorrect and not based on reality," as some people were confusing the concepts of tax rate and tax burden.

The United States had alleged that China collected 17 per cent VAT on imported semiconductor products, while the rate for domestic companies was only 3 per cent.

Local analysts said the 3 per cent actually means the rate of tax burden, which refers to the result of actual VAT divided by the total sales of a company.

Most domestic and foreign semiconductor companies have a tax burden rate below 3 per cent, so only a few businesses will benefit from the preferential policy.