• Each additional $1 spent on VAT rebates increased Chinese exports by $4.7. [Podcast], New Physical Products: Patents Should Come After Market Success. But, in some cases, the Chinese exporter tells a story to justify a delay, and the purchaser needs to understand the mechanisms at play in order to understand what really happened. This is the official blog of Sofeast.com. The process for VAT refunds on exports in China. (The amount of the rebate depends on the product HS code — the rebate goes from 0% to the full 16% of the value of the components.). The 13 percent tax is available for certain goods that fall mainly within the categories of agricultural and utility items, while the 17 percent tax applies to other goods subject to the VAT tax. A full list of refund rates can be found on the State Administration for Taxationwebsite. China gives full rebate (the whole 17%) on export sales of a few product categories. China’s VAT system is unique by international standards in applying VAT to most financial services (including interest income), and in applying VAT to real estate transactions involving not only business-to-business (B2B) and business- to-consumer (B2C) transactions, but consumer-to-consumer (C2C) as well. In the old days when large vertically-integrated government owned factories were the norm, they were the same company. However, often the refund rate will be less than the VAT amount paid on input. The two reduced VAT rates are 9% and 6%. That’s why you can expect a lot of “it depends”, “I am not sure”, and “it seldom works” when you ask your suppliers about it. VAT is a moving target, there is a lot of VAT reform and differing policies in China. In effect, neither pay VAT upon export. The forwarders, who often have an I/E (Import & Export) company on the side, monetize the rights to get shipments out in this manner. The problem is, many component suppliers, especially if … The problem is, many component suppliers, especially if they are small, don’t pay any VAT. While the guide provides an overview of the key features of China’s VAT system, in many cases the challenge in China is the implementation of these outcomes at a local level. Premier Li Keqiang recently confirmed that those rate reductions would take effect from 1 April 2019. If you can negotiate an ‘open book’ policy with your supplier, you might be able to track how much cash they get back… However, this is one of the topics on which Chinese suppliers tend to be very opaque. Their methods are proprietary and needless to say they pay up to the right people. It is common for the manufacturer and exporter to be separate companies. Exporters often don’t manufacture their own goods but since they must export under their own name, customers sometimes erroneously think that they are the manufacturer. The tax refund basis for export goods is very complicated. So here is what I understood about the VAT (Value Added Tax) system, and the rebate that applies to exported products. Manufacturers cannot ship goods out of the country without an exporter. VAT. Dmitri, thanks for adding to this article! In that case, there are much fewer controls from the Chinese government over what the product is made of. It's easy to subscribe to our newsletter where you'll receive weekly updates for professional importers and manufacturers on better understanding, controlling, and improving manufacturing & supply chain in China. Theory suggests value-added tax with incomplete export rebate act as export tax. China levies VAT on a broad range of goods and services. But back in the days those companies frequently made big loses. Tax Policy Department . Here is an overview of the conditions necessary to receive a VAT refund in China: the company must be registered on mainland China, absolutely not Hong Kong or Macau. VAT is only applicable in mainland China. Can all exporters prove that they have paid VAT on the parts, before exporting products? And the Chinese government give a VAT rebate to exporters — by the way, this is not unique to China, and many other countries collect no VAT on sales to foreign companies. VAT on goods exported is normally charged at a rate of 15% (standard rate), or 0% (zero rated). Unless the manufacturer can’t find an exporter willing to handle their shipment for reasons of quantity too small or they don’t like the rates charged by their exporter. If the VAT refund rate of the goods exported is less than 17 percent, such as 13 percent, the exporter is left with a 4 percent cost. All payments wired from abroad must also go through the exporter and the government keeps track of this in order to know how much to rebate. For more detailed, industry and geographic updates (such as what is happening in the Shanghai Free Trade Zone) type VAT into the search function of the China Briefing website and all the regulatory updates and commentary on how they affect foreign investors will appear. There won’t be any VAT rebates with this; at least not to the manufacturers. The difference between export money and regular money is that export money can go towards VAT rebates, while money wired directly to a manufacturer cannot. Exporters have the license to export and collect VAT rebates and profit from getting a cut out of the rebate. Tweet Renaud here or hit the button below to get in touch. However, once they start looking deep in their supply chain, they can identify risks as well as opportunities for saving money. (If any VAT is due in the destination country, the recipient pays it there.) • We study the impact of VAT rebates on Chinese exports using firm-level panel data. A friend tells me of many Africans who buy products on the market in Guangzhou and ship them to their country — they have to work with a freight forwarder who will sell them a “maidan chukou”. VAT rebates take months. Yes, It Often Does. This guide provides a broad overview of the key features of China’s VAT, and is presented in a way which should be readily accessible to an international audience. [Podcast], New Physical Products: Patents Should Come After Market Success. If they don’t pay up to the right people, ocean ports are known to give companies a difficult time by frequently inspecting containers from companies they don’t like and therefore delaying it for weeks or months. I am assuming the factories in China are Chinese registered businesses. Also, sales of residential property between consumers is subject to VAT, unlike in most other countries. This article explains three types of taxes – value-added tax (VAT), consumption tax, and customs duties – that foreign companies exporting to or importing from China must understand. Have a trading company (often with a name ending in “Import & Export Company”) that exports the goods in its name. Right, it is one of those things that need to be confirmed with the local government of with local service providers. However, when importing goods from China, you can’t pay the VAT directly to the supplier. VAT liability.6 The VAT payable for the EPE will be: output VAT - input VAT; the output VAT is computed as: FOB export value x (1 + 17%) x 17%.7 Claiming Export Refunds The VAT paid for the purchase of export goods in the Chinese market, or for purchases used in the manu-facture of export goods, can be refunded in whole or They see it as a ‘bonus’ that comes on top of the margin they built into their pricing, and it is not up for sharing with their customers! And there is no guarantee the application will be approved. Value-added Tax for imported goods All goods imported into China are subject to the nation’s value-added tax (VAT) of either 13 percent or 17 percent. Non-compliance could result in the seller of the movable goods being liable for output tax at the standard rate. Significant changes were recently made to the rules for the zero-rating of export sales. This blog is written by Renaud Anjoran, an ASQ Certified Quality Engineer who has been involved in Chinese manufacturing since 2005. The 10 percent deduction rate on agricultural products purchased by taxpayers will be adjusted to 9 percent. There’s no real ‘answer’ per se, it’s more ‘it depends…’ The system of the China VAT refund is especially appealing for exported goods and is become an integral part of the tax revenue of China. Similarly, the manufacturers of electronics in Shenzhen who buy parts illegally from Hong Kong (without paying any VAT) have to work with a freight forwarder to get their goods shipped out “under the radar”. It's easy to subscribe to our newsletter where you'll receive weekly updates for professional importers and manufacturers on better understanding, controlling, and improving manufacturing & supply chain in China. Following the 2012-16 VAT reforms, there are only four … To see a graphical representation of the VAT and VAT rebate flows, Good Project Management With Chinese Suppliers From A Product Designer’s Perspective [Podcast], 7 Reasons To Switch To A New Chinese Manufacturer, Why Do Importers Need Product Reliability Testing? It is illegal for the exporter to buy anything from them… and yet their prices are often much lower! China gives full rebate (the whole 17%) on export sales of a few product categories. What are the implications for foreign buyers? Quality Assurance, Product Development, and Purchasing Strategies in China. Why export declarations are often processed via an intermediary. Does Checking 100% of a Production Batch Make Sense? This blog is written by Renaud Anjoran, an ASQ Certified Quality Engineer who has been involved in Chinese manufacturing since 2005. Exporters are in the business of making money with money. Exports to EU countries are treated like those to non-EU countries, which is to say, they should be zero-rated for UK VAT. I am not the foremost expert on this topic! By way of context, in early March 2019, the Chinese government announced a reduction in its headline VAT rate from 16% to 13%, together with a reduction of its 10% VAT rate to 9%. They typically have an export license with a very wide product scope, so they can handle many product categories. When exporting goods overseas, no VAT will be charged to the exporters and VAT paid in the following transactions will be refundable in full or in portions from the Chinese government: The standard rate of VAT is 13%. As of 1 January 2021, when it comes to exporting goods to EU countries, the VAT situation also changes. And the Chinese government give a VAT rebate to exporters — by the way, this is not unique to China, and many other countries collect no VAT on sales to foreign companies. You can’t simply place an order with the factory, pay them, leave the stock in China, and then fulfil your orders from the factories warehouse inside China without taking into consideration local VAT and product legislation. Export VAT refund rates increased on over 1,400 goods in China On 17 March 2020, China’s Ministry of Finance and the State Taxation Administration (STA) issued Bulletin 15 increasing VAT refund rates for 1,464 goods as from 20 March 2020, in order to reduce VAT costs for exporters. And they might notice that their supplier pockets a margin much higher than they thought. If you make sales or purchases from countries who are members of the EC, then certain VAT regulations will apply, in particular you may need to complete a quarterly EC Sales List. This policy began in 1994 when the Chinese economy opened up to the world. VAT zero-rating rules for exports recently changed Tax Alerts An overview of the most significant changes. • We find robust evidence that VAT rebates increased Chinese firm's exports. It is not just a matter of VAT. Most importers buy their goods under FOB terms and don’t need to worry about the export procedures, which are handled by their suppliers. Following is a briefing of VAT under China 's tax system from China 's Ministry of Finance for your reference.. To collect this rebate, the exporters need to show that they have paid the VAT on the parts they purchased, and that they have exported the finished products. This document is, from my understanding, an authorization to export without the usual formalities. Quality Assurance, Product Development, and Purchasing Strategies in China. Yes, it often is. The solution? Zero-rated goods are technically subject to VAT, however this is set at zero percent. The system that has been put in place for tax refund in China is mainly through the return of export goods of domestic tax paid to balance the tax burden of local products. The standard VAT rate in China is 13%. For this group, any input VAT is refundable. Payment flow (from overseas customer to exporter, all the way to the component suppliers), Official VAT invoice (‘fapiao’), and a contract or a purchase order. For other categories, the rebate is lower, or even 0%. Does Checking 100% of a Production Batch Make Sense? The manufacturer doesn’t need to maintain good relations with the government but they must know how to manufacture. Calculation of VAT Rebates for Exports - "Exempt, Credit, Refund" ("ECR") Method. Of course not. The VAT rate that applies to manufacturing activities is 17% in China. From what I gathered, they typically get the refund several months later. A small category of … They also cannot receive “export related money” without going through an exporter. If you pay more VAT on your imports than you add on your sale price, you’ll get a refund. An Importer’s Guide to New Product Manufacturing in China in 2020, Good Project Management With Chinese Suppliers From A Product Designer’s Perspective [Podcast], 7 Reasons To Switch To A New Chinese Manufacturer, Why Do Importers Need Product Reliability Testing? In at least 95% of cases, the importer is better off buying under FOB terms, to avoid all these declarations. They are usually better off negotiating a price under the FOB incoterm and avoid worrying about the complex paperwork involved in getting a rebate on the VAT paid on components/materials. This notice cancels and replaces Notice 703 (November 2013). Tweet Renaud here or hit the button below to get in touch. VAT on exports . Goods and services being exported are either classified as zero-rated or exempt. VAT refund for exported goods refers to a system of refunding the VAT already paid or payable in China to the exporter or granting VAT exemption to the exporter. 4. In most cases, importers don’t need to worry about the way their supplier handles the VAT rebate. The fact that the exporter gets a VAT rebate, which might represent as much as 16% of the value of all materials and components embedded in the final product, is not something you might want to overlook. An Importer’s Guide to New Product Manufacturing in China in 2020. Companies formed in China are allowed to apply for a VAT refund when exporting goods overseas. It applies to most goods and services. Details of any changes to the previous version can be found in paragraph 1.2 of this notice.Parts of this notice have the force of law under section 30(6) of the VAT Act 1994 and regulation 129 of the VAT Regulations 1995. Smart buyers will note that it is safer to work with a Chinese company that has an. I would add that many manufacturers have their own export license and do the whole process themselves, rather than going through an exporter. The rebate is given back to the exporter about 5 months after the products were exported. Notable exceptions are exporters that are able to group together a diverse range of items and ship them all at once with little legal paperwork. The exporter (let’s say their a manufacturing company that assembles your product) needs to respect this logic: There are three flows must be fully legal and must match: China’s administration has gotten quite strict when it comes to approving a VAT rebate application, especially if the exporter is the manufacturer. Yes, It Often Does. The VAT rate that applies to manufacturing activities is 17% in China. The calculation of the export VAT refund is a complicated one but, to illustrate, when Chinese exporters incur VAT on costs (raw materials, overheads, machinery), they would typically pay 17 percent VAT on costs. Any delays will be in collecting the rebate and not in shipping out the goods. This includes imports; however exports are exempt. Everything you wrote sounds very correct. You are able to make supplies to EC customers without VAT so long as … The manufacturer deliver the goods to the ocean port and wait for the exporter to collect the payment from the foreign company before wiring it to the manufacturer in RMB. Of course they only go after the fat cats. When importing products, the same principle applies. Did I get this right? Unusually, most financial services are liable to VAT, including deposit account interest. Simply because Chinese businesses belong to a different tax system, and are not VAT registered in the EU. Their niche is that they must maintain good relations with the government and with ocean ports. Briefing of VAT Under China's Tax System . China’s administration has gotten quite strict when it comes to approving a VAT rebate application, especially if the exporter is the manufacturer. I hope this topic is a bit clearer now… Getting all the ducks in a row and having a successful application is not easy, but it is often worth it for exporting companies! If you purchase 2 million USD a year of a certain product, and the value of the components is 1.5 million USD, the “extra cash” pocketed by the exporter might be up to 240,000 USD! When exporting goods from the RSA to any export country, you have to distinguish between two types of exports, called direct and indirect export. You zero-rate VAT on goods exported to VAT-registered people within the EU. The manufacturer can’t afford to wait that long so the custom is for the exporter to estimate the rebate and give it to the manufacturer as soon as they collect the payment from the customer. This is the official blog of Sofeast.com. The rebate will be raised to 6 percent for exports currently getting a 5 percent rebate, though for some it will be raised to 10 percent. It depends on what industries China wants to encourage. The exporter takes a cut and converts the rest to RMB and wires it to the manufacturer. Beginning April 1, 2019, taxpayers who were originally subject to VAT rates of 16 percent and 10 percent imports or exports of goods and services, will now be subject to an adjusted 13 percent and 9 percent, respectively. Nowadays, those 2 entities are mostly split for SMEs. China also has some zero-rated goods, the sale of which must still be reported on your VAT return, even though no VAT is charged. When they finish their goods, they choose an exporter and export goods under the exporters name. 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