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. And they might notice that their supplier pockets a margin much higher than they thought. VAT on exports . The standard rate of VAT is 13%. 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”. 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 â by the way, this is not unique to China, and many other countries collect no VAT on sales to foreign companies. 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. The problem is, many component suppliers, especially if ⦠Does Checking 100% of a Production Batch Make Sense? 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. 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. 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. Dmitri, thanks for adding to this article! This blog is written by Renaud Anjoran, an ASQ Certified Quality Engineer who has been involved in Chinese manufacturing since 2005. Any delays will be in collecting the rebate and not in shipping out the goods. 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. ⢠We study the impact of VAT rebates on Chinese exports using firm-level panel data. This article explains three types of taxes â value-added tax (VAT), consumption tax, and customs duties â that foreign companies exporting to or importing from China must understand. What are the implications for foreign buyers? The VAT rate that applies to manufacturing activities is 17% in China. There won’t be any VAT rebates with this; at least not to the manufacturers. This is the official blog of Sofeast.com. The solution? Have a trading company (often with a name ending in “Import & Export Company”) that exports the goods in its name. 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. It depends on what industries China wants to encourage. Manufacturers cannot ship goods out of the country without an exporter. 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. 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. 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. The rebate is given back to the exporter about 5 months after the products were exported. It is illegal for the exporter to buy anything from them… and yet their prices are often much lower! For other categories, the rebate is lower, or even 0%. Exporters are in the business of making money with money. Their niche is that they must maintain good relations with the government and with ocean ports. Calculation of VAT Rebates for Exports - "Exempt, Credit, Refund" ("ECR") Method. Yes, it often is. Also, sales of residential property between consumers is subject to VAT, unlike in most other countries. From what I gathered, they typically get the refund several months later. Exports to EU countries are treated like those to non-EU countries, which is to say, they should be zero-rated for UK VAT. Tax Policy Department . They also cannot receive “export related money” without going through an exporter. When exporting goods from the RSA to any export country, you have to distinguish between two types of exports, called direct and indirect export. When they finish their goods, they choose an exporter and export goods under the exporters name. You canât 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. The forwarders, who often have an I/E (Import & Export) company on the side, monetize the rights to get shipments out in this manner. However, once they start looking deep in their supply chain, they can identify risks as well as opportunities for saving money. 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. Tweet Renaud here or hit the button below to get in touch. In effect, neither pay VAT upon export. The process for VAT refunds on exports in China. Quality Assurance, Product Development, and Purchasing Strategies in China. 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. 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. 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. 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. It applies to most goods and services. 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! Most importers buy their goods under FOB terms and don’t need to worry about the export procedures, which are handled by their suppliers. Chinaâs 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. Did I get this right? In at least 95% of cases, the importer is better off buying under FOB terms, to avoid all these declarations. Nowadays, those 2 entities are mostly split for SMEs. Significant changes were recently made to the rules for the zero-rating of export sales. 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. I would add that many manufacturers have their own export license and do the whole process themselves, rather than going through an exporter. In the old days when large vertically-integrated government owned factories were the norm, they were the same company. This notice cancels and replaces Notice 703 (November 2013). 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! 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. The two reduced VAT rates are 9% and 6%. 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. 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. Of course they only go after the fat cats. Exporters have the license to export and collect VAT rebates and profit from getting a cut out of the rebate. There’s no real ‘answer’ per se, it’s more ‘it depends…’ 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. Goods and services being exported are either classified as zero-rated or exempt. Following is a briefing of VAT under China 's tax system from China 's Ministry of Finance for your reference.. Smart buyers will note that it is safer to work with a Chinese company that has an. Everything you wrote sounds very correct. 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? 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. You zero-rate VAT on goods exported to VAT-registered people within the EU. The manufacturer doesn’t need to maintain good relations with the government but they must know how to manufacture. [Podcast], New Physical Products: Patents Should Come After Market Success. 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. 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. Quality Assurance, Product Development, and Purchasing Strategies in China. So here is what I understood about the VAT (Value Added Tax) system, and the rebate that applies to exported products. However, often the refund rate will be less than the VAT amount paid on input. 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? VAT zero-rating rules for exports recently changed Tax Alerts An overview of the most significant changes. The tax refund basis for export goods is very complicated. 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. The 10 percent deduction rate on agricultural products purchased by taxpayers will be adjusted to 9 percent. The standard VAT rate in China is 13%. This includes imports; however exports are exempt. 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. China gives full rebate (the whole 17%) on export sales of a few product categories. 4. Companies formed in China are allowed to apply for a VAT refund when exporting goods overseas. You are able to make supplies to EC customers without VAT so long as ⦠This document is, from my understanding, an authorization to export without the usual formalities. 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. 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. 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. ⢠We find robust evidence that VAT rebates increased Chinese firm's exports. 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! The VAT rate that applies to manufacturing activities is 17% in China. The exporter takes a cut and converts the rest to RMB and wires it to the manufacturer. (If any VAT is due in the destination country, the recipient pays it there.) Export VAT refund rates increased on over 1,400 goods in China On 17 March 2020, Chinaâs 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. China levies VAT on a broad range of goods and services. Unusually, most financial services are liable to VAT, including deposit account interest. Non-compliance could result in the seller of the movable goods being liable for output tax at the standard rate. A full list of refund rates can be found on the State Administration for Taxationwebsite. Theory suggests value-added tax with incomplete export rebate act as export tax. While the guide provides an overview of the key features of Chinaâs VAT system, in many cases the challenge in China is the implementation of these outcomes at a local level. In most cases, importers don’t need to worry about the way their supplier handles the VAT rebate. VAT is a moving target, there is a lot of VAT reform and differing policies in China. An Importer’s Guide to New Product Manufacturing in China in 2020. VAT. Premier Li Keqiang recently confirmed that those rate reductions would take effect from 1 April 2019. It is common for the manufacturer and exporter to be separate companies. Yes, It Often Does. For this group, any input VAT is refundable. 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%. Few product categories Physical products: Patents Should Come after Market Success, New Physical:. 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