Also, sales of residential property between consumers is subject to VAT, unlike in most other countries. 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? The standard VAT rate in China is 13%. Briefing of VAT Under China's Tax System . Does Checking 100% of a Production Batch Make Sense? 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. From what I gathered, they typically get the refund several months later. Manufacturers cannot ship goods out of the country without an exporter. It depends on what industries China wants to encourage. This blog is written by Renaud Anjoran, an ASQ Certified Quality Engineer who has been involved in Chinese manufacturing since 2005. 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. Tweet Renaud here or hit the button below to get in touch. So here is what I understood about the VAT (Value Added Tax) system, and the rebate that applies to exported products. Exporters are in the business of making money with money. 4. • We find robust evidence that VAT rebates increased Chinese firm's exports. 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. They typically have an export license with a very wide product scope, so they can handle many product categories. 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. 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. 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. 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. In that case, there are much fewer controls from the Chinese government over what the product is made of. 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 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. In the old days when large vertically-integrated government owned factories were the norm, they were the same company. Theory suggests value-added tax with incomplete export rebate act as export tax. Tweet Renaud here or hit the button below to get in touch. Dmitri, thanks for adding to this article! (If any VAT is due in the destination country, the recipient pays it there.) VAT zero-rating rules for exports recently changed Tax Alerts An overview of the most significant changes. It is not just a matter of VAT. 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”. 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. China’s administration has gotten quite strict when it comes to approving a VAT rebate application, especially if the exporter is the manufacturer. Why export declarations are often processed via an intermediary. Following the 2012-16 VAT reforms, there are only four … Goods and services being exported are either classified as zero-rated or exempt. 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. 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! They are mostly used for shipping small quantities of items where the process of applying for the VAT rebate costs more than then getting the rebate, and sometimes exporters won’t even want to deal with manufacturers making small quantities as it’s not worth the business. Most importers buy their goods under FOB terms and don’t need to worry about the export procedures, which are handled by their suppliers. I would add that many manufacturers have their own export license and do the whole process themselves, rather than going through an exporter. China levies VAT on a broad range of goods and services. An Importer’s Guide to New Product Manufacturing in China in 2020. 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. The standard rate of VAT is 13%. Exporters have the license to export and collect VAT rebates and profit from getting a cut out of the rebate. This is the official blog of Sofeast.com. This policy began in 1994 when the Chinese economy opened up to the world. Does Checking 100% of a Production Batch Make Sense? This notice cancels and replaces Notice 703 (November 2013). 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. This document is, from my understanding, an authorization to export without the usual formalities. VAT is a moving target, there is a lot of VAT reform and differing policies in China. The problem is, many component suppliers, especially if … The VAT rate that applies to manufacturing activities is 17% in China. Exports to EU countries are treated like those to non-EU countries, which is to say, they should be zero-rated for UK VAT. For other categories, the rebate is lower, or even 0%. Did I get this right? 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. The 10 percent deduction rate on agricultural products purchased by taxpayers will be adjusted to 9 percent. 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. 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. 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. Yes, It Often Does. The problem is, many component suppliers, especially if they are small, don’t pay any VAT. Non-compliance could result in the seller of the movable goods being liable for output tax at the standard rate. It is illegal for the exporter to buy anything from them… and yet their prices are often much lower! • We study the impact of VAT rebates on Chinese exports using firm-level panel data. 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. 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: It applies to most goods and services. 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! Simply because Chinese businesses belong to a different tax system, and are not VAT registered in the EU. Any delays will be in collecting the rebate and not in shipping out the goods. Following is a briefing of VAT under China 's tax system from China 's Ministry of Finance for your reference.. The process for VAT refunds on exports in China. Zero-rated goods are technically subject to VAT, however this is set at zero percent. 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. Quality Assurance, Product Development, and Purchasing Strategies in China. The solution? 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. 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 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.). But back in the days those companies frequently made big loses. Their niche is that they must maintain good relations with the government and with ocean ports. Everything you wrote sounds very correct. As of 1 January 2021, when it comes to exporting goods to EU countries, the VAT situation also changes. For this group, any input VAT is refundable. In effect, neither pay VAT upon export. VAT on exports . Yes, it often is. Can all exporters prove that they have paid VAT on the parts, before exporting products? What are the implications for foreign buyers? You are able to make supplies to EC customers without VAT so long as … Quality Assurance, Product Development, and Purchasing Strategies in China. However, once they start looking deep in their supply chain, they can identify risks as well as opportunities for saving money. Smart buyers will note that it is safer to work with a Chinese company that has an. The VAT rate that applies to manufacturing activities is 17% in China. 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. The forwarders, who often have an I/E (Import & Export) company on the side, monetize the rights to get shipments out in this manner. This includes imports; however exports are exempt. 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”. And they might notice that their supplier pockets a margin much higher than they thought. 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. [Podcast], New Physical Products: Patents Should Come After Market Success. • Each additional $1 spent on VAT rebates increased Chinese exports by $4.7. 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. 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! 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. There won’t be any VAT rebates with this; at least not to the manufacturers. When they finish their goods, they choose an exporter and export goods under the exporters name. VAT rebates take months. 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. They also cannot receive “export related money” without going through an exporter. 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. Yes, It Often Does. VAT is only applicable in mainland China. 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. VAT on goods exported is normally charged at a rate of 15% (standard rate), or 0% (zero rated). 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? A small category of … Companies formed in China are allowed to apply for a VAT refund when exporting goods overseas. I am not the foremost expert on this topic! This is the official blog of Sofeast.com. Have a trading company (often with a name ending in “Import & Export Company”) that exports the goods in its name. Calculation of VAT Rebates for Exports - "Exempt, Credit, Refund" ("ECR") Method. 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. When exporting goods from the RSA to any export country, you have to distinguish between two types of exports, called direct and indirect export. If you pay more VAT on your imports than you add on your sale price, you’ll get a refund. Unusually, most financial services are liable to VAT, including deposit account interest. Tax Policy Department . 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. The exporter takes a cut and converts the rest to RMB and wires it to the manufacturer. There’s no real ‘answer’ per se, it’s more ‘it depends…’ Right, it is one of those things that need to be confirmed with the local government of with local service providers. Of course not. The two reduced VAT rates are 9% and 6%. [ Podcast ], New Physical products: Patents Should Come after Market Success were... 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