Understanding VAT in China: Who pays?

In response to my recent blog post on VAT scams, Steve in the USA asks; “My understanding is that on direct exports from mainland China there is no vat tax that the foreign buyer need to pay the PRC government. Is that true?”

Here is my response to aid Steve and others in understanding VAT in China:

a) Unless the foreign buyer has an office in China and is the exporter of record out of China, the overseas buyer is not expected to pay any VAT to the PRC government.

Let’s say you are buying tennis rackets (I was watching Wimbledon last night) and the parties involved are the manufacturer, an exporter and you the buyer. The manufacturer is responsible for paying the VAT as they are “adding value” when making the tennis rackets. The exporter who ships the product out of China (assuming they are following the law) would get a VAT rebate . The VAT paid in and rebate out is all sorted before the goods are in the hands of the buyer.

b) Sounds simple right? But in practice, the exporter may work with the manufacturer to pull a fast one on the foreign buyer by exploiting the buyer’s lack of knowledge of the VAT process. It is not uncommon for the exporter to tell the foreign buyer that in addition to the unit price there is a VAT tax and or a import-export fee. Those items should be included in an “FOB port” unit price already, so if the seller tries to break them out separate, in addition to the FOB price, then it is probably a tactic to get more money out of your pocket.

Has anybody else out there come up against this “VAT trick” when dealing with your China supply chain? How did things work out for you? Was my assessment above accurate in your case as well?