What is VAT rebate in China and how to negotiate a better price?

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VAT Rebate in China

Below is a typical discussions that happens when prospective clients contact PassageMaker for help clarifying the VAT rebates in hopes of negotiating a better price from their suppliers.

It starts with a simple question like “what is the VAT rebate rate in China on the products I am purchasing” but quickly moves to “how can I use this knowledge to negotiate a better price in China”.

We are always happy to help, and share the email below for your reference. While you probably aren’t in the shoe business, you may be thinking about similar issues. Hope you enjoy the blog post below and feel free to contact us if you would like more information.

Mike, Can you advise what the VAT rebate % is for footwear. If it is different for different types of footwear, please detail.

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I would be happy to have my staff look up footwear VAT rebate. I believe there may be different rates for different types of footwear. Do you happen to know the HS codes of the products you would like me to look up? That would help a lot. If not, send me a picture and description and I will have my team look up the HS code and then dig up the VAT rate for that code.

Our products fit into the 6402, 6403, 6404, 6405 HTS codes. We primarily do Winter boots in leather or synthetic, we do rubber boots, and we do sandals and shoes in leather and synthetic. so basically we cover most of the footwear categories

Good news. They are all the same VAT rebate. 15%.

If I could impose on you again to clarify something. Is the 15% rebate based on the invoice price, in which case you get back 15/17ths of what you paid ( almost the whole amount ) or is it based on 15% of the VAT that you pay within your invoice price, which is a much lesser amount.


The factory invoices our agent for $18.34 per pair. Assuming that includes VAT, the VAT included is $2.66. Is the export rebate $2.35 ( 15/17ths of $2.66) or $0.40 ( 15% of $2.66 )

Excellent question. That would be the logical way to do it. But it is a bit more tricky in China and there are lots of variables and assumptions. But for the sake of giving you a feel for how it works, and assuming the price paid to the supplier includes proper VAT-paid invoice (essential for the formula to work), then if you paid 1 RMB (inclusive of tax) your VAT rebate at export (assuming 15% rebate rate in your products case) would be 0.128

First step: calculate the price before VAT (1 RMB / 1.17) = 0.8547

Second: apply the rebate rate to that price 0.8547 X .15= .128

Those are the broad strokes.

We have found out that most of the factories we deal with have an import/export licence. We conclude that they are invoicing our agent at their Hong Kong address, and therefore they are collecting the export rebate from the China Govt. because they are the official exporter out of China. If that is the case, we have to think about how we approach them regarding our pricing, especially if it is the higher of the 2 amounts in the example

Yes, it is very wise to understand how VAT plays a role in your supply chain. As mentioned in a previous email, you may be able to save time and frustration if you engage PassageMaker to get some competitive quotes and do a VAT survey to see if you are being respected by your current partners. This can be done without making it public who is asking.

Stay out of jail by navigating product safety in China!


Product Safety in China: Is My Product Safe?

Physical SafetyOK

When people ask “is my product safe?” most of the time they are asking the question because they want to make sure the product won’t hurt anybody and to be sure they are not at risk of a lawsuit. We could call this “design safety”.

Meaning, for example, the product has no pinch points, sharp edges or dangerous materials. If your product is in the concept or design stages, it is very important that not only can your design engineers come up with something that appeals to the market place, but is also needs to be physically safe. Imagine spending thousands of dollars on a design only to learn that it is not fit for function or unsafe.

Regardless if you design in-house or outsource the engineering, make sure your design and engineering team are fluent in DFM and that they have a solid understanding of the regulations in your marketplace. And that brings us to regulatory compliance.


Broken car 300x180
As mentioned above, not only should we be thinking about physical safety, but we also need to make sure that our product can be imported into our market with no complications. For example, the safety regulations for a toy, electronics, or piece of furniture can be radically different in Jordan, Jamaica and Japan. You risk wasting a lot of money if your product is not engineered from day 1 to meet those standards.

Who can you trust?

Since standards are constantly updated and vary from country to country, you are at great risk to simply take your suppliers word for it. They want your order, so of course they will say “sure it is safe.” But if the product is not safe from a physical safety or regulatory compliance point of view, and God forbid, somebody gets hurt….who are the lawyers and government officials in your marketplace going to come after? An overseas supplier in China? No way, they will come after the importer of record. And that means you.

So as buyers, it is our responsibility to confirm the product is safe. Assuming you had it engineered right, the next step is to take the prototype or sample and get it to a reputable testing lab. The big international labs stay up to date on the latest rules and regulations for all the major markets. As they have offices in China, you need not send your widget back home to be tested. Plus even the testing costs are less in China, generally speaking.

Most new importers don’t realize they can take their widget to a lab and say “I want to import this to X country, how much will you charge me to test that this product and packaging fully conforms with all standards?”. The sales guy at the lab will pull out a giant book full of protocols and prices and in a few minutes you may learn that it really doesn’t cost that much to confirm your product is safe.

Can I sleep well at night?

Well before you start patting yourself on the back for working so hard to make sure your product is safe. Don’t forget that at the lab, you simply confirmed that one unit was safe. Now you need to make sure that when full production is running, every unit that comes off the line is safe.

But it is not realistic to send 100% of production to the lab for testing, so as buyers we need to come up with a realistic factory audit, production inspection and product testing plan. The factory audit may take place once or twice a year to confirm that the shop is being managed with a Quality 1st mentality.

In other words, they are running their factory in a well-documented and “safe” manner. Production inspection should be taking place with every order before the goods ship out of China. You or an independent inspector will go to the site of production and verify what is coming off the line is safe. In this case, safe means that it matches the specs set by the master sample which was tested by the lab to be safe.

Unfortunately, you still can’t call it a day just yet. Because, unless the order is tiny, the inspection will not be 100%. It will be based on a statistically reliable sample size, using an AQL chart. While the inspector can easily check the physically properties of production pieces, it is hard for them to check the chemical properties. So some parts should be picked at random and send to the lab.

How many pieces to send to the lab each production run is a hard question to answer and there is no universal formula and if you ask that question to your government, your lawyer, a testing lab and the inspection partner you may get four different answers. But if something goes wrong in the market place and a person is hurt, you will certainly be called upon to show your audit, inspection AND testing records. So being able to show you have a plan in place is a big step in the right direction. Getting caught without a well-documented plan or recorded results will exposure you significantly if the case ever went to court.

Benefits of using a warehouse in China to ship stock to your customers

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Small Shipments?

If you are evaluating the benefits of using a warehouse in China to ship stock to your international customers, then this article is for you. While, consolidated shipments offer freight savings, shipping in smaller batches is more expensive but it reduces the lead time to your customer. This is an issue many businesses struggle to balance.

In this blog post we’ll explore some of the not-so-obvious, but real and proven advantages of using a consolidation point in China, along the lines of what PassageMaker clients enjoy.

Quality Gate

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Since we are physically touching the boxes to put them in our Buji warehouse, it is easy to apply a quality gate. Payments to suppliers are linked to this quality gate. Linking payments to supplier performance is a powerful incentive and any QC issue/supplier payment adjustments are sorted out BEFORE the goods leave China.

Standardized Packaging

Some of our clients have the products sourced from various suppliers, packaging from a single supplier, then the goods/packaging are delivered to us and we QC while putting the product into the boxes. This kills 3 birds with one stone- QC, matching packaging across multiple vendors & inventory transparency. Along with the freight benefits of consolidation of course.

VAT considerations

Here is a technical reason why PassageMaker has won this type of work for our clients:

If the goods come from multiple vendors and the consolidation point is inside China, then the consolidation partner is responsible for clearing outbound customs, sorting out the VAT rebates. It’s also important that the consolidation partner has the correct scope on their business license.

I’m happy to say PassageMaker has the right business license, has import-export rights and with 2 in-house licensed customs brokers I ensure our clients are getting the maximum rebate on the VAT when exported.

And if some day you wish to sell to China based customers …know that our licensing also allows us to service that market by accepting RMB (on your behalf, convert into USD and repatriate the profits minus our service fee back to client) and providing the ‘Fapiao‘ (official receipts) to the domestic buyers.

China sourcing: Negotiation, Contracts and Payments

China sourcing negotiation contracts and payments

Exclusive recording of Mike Bellamy’s Sourcing Tutorial at the April 2014 Global Sources Trade Show in Hong Kong.
Learn the key factors and actionable knowledge that will help you prepare for “Chinese negotiation” and place safe orders!

Without a good foundation, your China sourcing project is likely to fail!

Mike Bellamy (PassageMaker founder) offers tips and best practices to ensure you are well positioned before the PO is even placed. Learn how to negotiate contract terms, and structure your payments, to protect your interests when doing business in China. The video tutorial covers some of the most important areas to consider before investing time and money on a China sourcing project. The recording of this seminar covers:

● The dos and don’ts of quality control, logistics and payment methods

● How to protect intellectual property

● Cost drivers and cost breakdown analysis

● Proven negotiation techniques

● Insight into the thinking of your Chinese suppliers

How to organise an effective RFQ in China

How to organise an effective RFQ in China

My friend and fellow CSIC contributor Neale O’Connor is a Visiting Associate Professor at the National University of Singapore. As part of a research project, he had his students contact almost 50 suppliers in China to get quotes on USB drives.

You can find the data below. Here are my suggested takeaways from the research. While the pricing points may be of interest if you are a buyer of USB’s, for me the most interesting aspect is the way in which the quotes were received from the suppliers.

Keep in mind that the students asked all the suppliers to quote on the same specs and counter sample. Yet you can clearly see below that no two quotes share the same format. Every price is different, just as every quote format is different. Currencies, MOQ, Specs are jumbled together in way that makes it impossible for a buyer to conduct an apples to apples comparison of the supplier simply by price.

Lead times, MOQ, Specification (quality level) all impact the price. Picking the lowest price offer is most likely not the best option from the 45 choices below.

Since China doesn’t have a standard format for the factory quotes, how to plan an effective RFQ in China (request for quotation)?

Here is a behind the scenes look at how companies like PassageMaker conduct the research to find factory direct sources for our clients. The single most important factor in determining the success or failure of your sourcing program will be finding the right supplier. It sounds obvious, but making apples-to-apples comparisons of vendors at a national level can be daunting. Just look at how messy the data is from the USB suppliers below.

Phase One “Defining”

The “right supplier” is unique to each buyer. Force yourself to list all the desired attributes of the product and factory and rank them. Beyond the holy trinity of price/quality/lead-time also think of attributes like location (do they need to be near a certain port or in area where you have other vendors), Capacity, Service Attitude, Language, Intellectual Property, Warranty Terms, Factory Ownership, Equipment, Export Experience and so on.

Phase Two “Initial Research”

Initial research generates a list of 50-100 potential Chinese suppliers using existing vendors in the AVL (approved vendor list) and web directories and industry/trade show directories.

Assume the vendor is a middleman until proven otherwise, not the other way around.

Avoid factories that refuse to list the name or location of the production facility- they probably don’t own the PRC factory and are a middleman of some sort.

Focus on those factories that can clearly show production experience with your particular product or production method.

Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.

Review the 50-100 candidates’ websites and brochures against client’s desired attribute list. But hold off on asking for price or even contacting the potential suppliers until step 3. If you start asking about price too early you will subconsciously gravitate to the vendors with the lowest price. That may or may not be the best overall option. Narrow the field down to 15 to 20 candidates based on non-price attributes.

Phase Three “First Contact”

At this point, “first contact” is initiated with 15-20 vendors in the following 5-step process.

Step one: Send an e-mail to ask for a quote. That sounds easy enough, but if you don’t follow some simple tips, you will most likely get a mess like the students got when researching the USB prices below.

Time Saving Tips:

a) Give the supplier your RFQ form to fill in which specifies the attributes you care about. That way all the suppliers are filling out the same form with the same fields. This will make it a lot easier for you to compare options.

b) For reference, also ask them to offer a quote in the standard format they use. If they don’t have a formal quote sheet, run away. That’s a red flag that they are not professional.

c) Be as specific as possible in the product description. Ask the supplier to quote to your spec. If they quote off-spec, ask them to explain in detail where their quote differs from your specs.

Step two: Are samples available? If they don’t have samples readily available, they probably don’t deal in your product on a regular basis.

Step three: Granted the sales team will be the most polished in terms of English skills, but how is their understanding of your basic requests? If you ask for information on a red umbrella and get sent a sample of a blue shoe, you are going to have problems with communication down the road!

Step four: Don’t be seduced by the siren’s song of low price. The lowest unit price can be the most expensive supplier after you factor in the cost of defects, missed deliveries and operations headaches!

Step five: Confirm the actual production location and ask for ownership papers of the factory. Be explicit that the production location may be audited and that this location cannot be changed w/out approval of buyer. (You would be surprised at the number of middlemen who will take the buyer on a visit of a factory only to change the location to a less expensive and poorer quality option after the buyer leaves)

The above research should narrow the field down to about 5 highly qualified candidates. As that point you can, with confidence, move to the final steps of negotiation, due diligence/auditing and sampling.

Related Content and Reference Material

Data from Prof. O’Connor’s research on USB pricing is listed below.

How do we choose a good manufacturer in China?

Video 1: Finding Suppliers

Video 2: Evaluating Suppliers

Video 3: Negotiations

Video 4: Project Management and Quality Control

Video 8: Avoiding Scams

QuoteNamePriceMin. OrderDelivery TermsEssential Details
1ISINO Industrial Development Co.LtdSGD4.0310002 years warranty
2Nextkey Technology Co. LtdUSD3.499100Delivery date is 2 to 3 working days after order is confirmed. Shipping cost depend son the total quantity and delivery address.12 months warranty. Quotation price valid for 4 days. Payment is made through T/T to company account. *Price quotation based on 1000 pieces.
3Hongkong Xinkang Industry Co LimitedUSD2.65Shipping fee of 1000 pcs is US$100 with door to door delivery. EMS, DHL UPS and TNT available for shipping. Delivery within 3 to 7 days.5 years warranty.
4ShenZhen Wing Digital Co.,LtdSGD0.9200Shipping terms: EMS,DHL,UPS,FedEx; FOB Price; Delivery time 4-7 days; 5 Years WarrantyFor order of 1000pc, additional 10% off with free 50 pcs
5Shenzhen Kongs Technology LimitedSGD3.431000$120 DHL delivery
6Shenzhen Full USB Co. LtdSGD1.00500 pieces– 3 Days – Free Delivery– Free printing of logo – 2 year warranty – Return/Refunds if broken along delivery
7Shenzhen Alpha Technology Co LtdSGD3.3nil-7 Days – USD 238Logo engraving included
8Zhenghong (HK) Technology Co LtdSGD4.15nil– 3 Days – Free Delivery– One Year Warranty – Logo Engraving included
9East Sky Industry Co.,LimitedUSD 3.27/USD 3.54100 units– Mass production will be done within 4-5 working days(after our Chinese New Year Holiday) – We are on Chinese new Year holiday from Jan.,25,2014 to Feb.,8,2014 and start to work on Feb.,9,2014. ***Production and delivery is 15-20 days depending on the complexity of the design (info from company website)– Our price is for 100% genuine memory capacity,if you find any upgraded USB from us, you can send back to us and we will send back to you new one. – Our quality is very good, we can control RMA rate as 0.1% or below.
10 Shenzhen Ninesong Technology Co. LtdSGD3.5503-4 days, Free ShippingPayment by Western Union, T/T, Letter of Credit, Alipay, Paypal, 3 years warranty
11Fortune Port Technology LtdSGD2.002005-7 days3 years warranty, 30% deposit in advance, Western Union, TT, LC, Alipay, Paypal
12Fuzhou Everkings Import & Export Co LtdSGD1.51003-7 days after order made, plus free samples2 years warranty, L/C, T/T, Western Union, MoneyGram, Paypal, Escrow
13GIGAFLASH LIMITEDUSD3.751000NAPrice valid 2 days from now
14VTD Technology International Co., LtdSGD4.1100Door-to-Door Delivery;Incl. of shipping insurance (coverage unstated);Excl. Singapore Import TaxPrinting on one side only;Payment must be made through Western Union;Part payment allowed:at least 30% before production begins;remainder pior to shipping out of the factory (photo verification provided)
15Nantai TechnologySGD4.251000 pcsDelivery charge $100Warranty of 2 years
16Flason Electronic Co.,LimitedUSD4.05100Not specified– Flash price is not very stable, so the final price will be subject to the day’s market price you confirm the order. – Payment terms: TT or Western Union – Warranty Term: 2 Years
17Weterm International Co., LtdUSD3.47Not specifiedFedEx shipping cost:US$135 *delivery time: 5-6 working days*both sides full color logo included *each in a poly bag *price valid before Chinese New Year Festival
18Shenzhen Baizhi Electronic Co., Ltd.USD4.841000 piecesFOBFree engraving, data pre-load and autorun
19Shenzhen Oriphe Technology Co., Ltd.USD3.181000 piecesUSD216 via FEDEXFree engraving under 3 colours
20Shenzhen Dingsheng Electronic Co. LtdUSD2.80100 PiecesLead Time: 3-4 days, Free deliveryFree packaging, Free samples
21ISINO Industrial Development Co.LtdSGD4.031000Delivery Not included2 years warranty
22Gigaflash Limited (Vida Design Ltd)USD3.851000 piecesFOB Port (HK SAR)Laser Engraving of Logo Included, 1 year warranty, With RoHS, CE and FCC marks, 7-8 day Lead Time
23Nextkey TechnologyUSD 2.598500pcsLead time for mass production: 3-4 days after payment received. Shipping cost: depends on the order quantity and delivery address.1 year warranty The price is valid for 2 days Lead time for sample: 3-4 days after payment received. Sample price is USD10 more, but we will return sample cost when you place order with us. Payment: T/T to company account
24FlashbaySGD7.841000 pieces6 days from receiving payment10 years warranty
25Industrial Co., Ltd / Shenzhen Alpha Technology Co., LtdSGD3.31000Shipping cost by DHL, CIF Singapore: $2383. Lead time: We only can provide usb to you about 2/16, as we are in CNY holiday now ,and we will come back to work on 2/9, thanks.Payment: T/T in advance to our bank account
26Bestar Industrial HK LimitedUSD4.051000 pcsFOB ShenzhenFree warranty: 2 years. Payment via TT: 30% deposit in advance, balance due before shipment.
27East Sky Industry CoUSD3.271000 pcsFOB ShenzhenProduction time: 4 – 5 working days
28SHIXIN Venture Trading Co., Ltd.USD3.55No MOQFOB Shanghai, delivery within 3 – 7 working daysPayment via TT: Before shipment.
29Xiamen HuachangUSD2.191000 pcsFOB Taiwan via EMS / DHL / China Post / HK PostInternational warranty: 5 years.
30New Rich Industry Development Co., LimitedUSD2.501000 pcsFOB Shenzhen, delivery within 3 – 5 working days
31Shenzhen USB High Electric Co., LtdUSD3.001000 pcsFOB ShenzhenProduction time: 3 – 5 working days
32Shenzhen USB High Electric Co., LtdUSD3.10100 PiecesDelivery way : DHL , UPS ,EMS and FEDES;3、Lead Time : Money can be received later 10days can delivery 4、Sample lead time : 1~3days
33 Shenzhen Honorwell Technology Co., LtdSGD3.901000 pcsusd 170 for DHL deliveryProduction time: 6-7days
34Weterm International Co., LtdUS3.22FedEx shipping cost:US$135; delivery time: 5-6 working daysprice valid before Chinese New Year Festival.(we will on holiday from 25th Jan to 6th Feb for CNY)
35East Sky Industry Co.,LimitedUS3.271000 pcsShipment cost by DHL (door to door) to SingaporePlastic box (95*45*21mm): US$0.12/pcs added on above quotation.
36SHIXIN Venture Trading Co., Ltd.USD3.55 NO MOQDelivery time :3~7 working days
37EbayUSD$4.031000 piecesAddress to be per the one on the PayPal or Credit Card (this is according to the policies PayPal and Credit.Do not ship to any international addresses à But upon enquiry (see above), they are willing to ship to30 days have receiving the item; Money back; Buyer to pay for return shipping
38Lion City Gifts located in SingaporeSGD$5.7550 piecesFree local delivery to 1 locationNett price. Free white cardboard box.
39 itforlessusa from eBay located in New York, United StatesUSD$4.031,000 piecesShips to SingaporeReturn policy within 30 days of receiving item with money back but buyer has to pay for return shipping. Payment to be made through wire transfer or western union. 1 year warranty.
40Flason Electronic Co.,LimitedUSD 4.66Within China, paid by customerWarranty Term: 2 Years
41晟济旗舰店SGD3.7No MOQWithin China, paid by customerUnconditional return within 7 days, money back within 2-3 days
42深圳市泰达兴科技有限公司SGD0.810Within China, paid by customerWarranty: 3 years
43Xia Men Hua ChangUSD2.991000 piecesFOB shanghai by EMS/DHL/China post/HK postinternational warranty . 5 years
44New Rich Industry Development Co., LimitedUSD2.50Not specifiedDelivery time :3-5 work day;DHL (CIF to your door by DHL)
45FlashbayUSD16.2725Delivery is $55.00 for any quantity to Singapore.All product prices include branding with your artwork on both the front and back (where possible). There are no origination/setup charges.

Is dealing with a Hong Kong company safer?

Is dealing with a Hong Kong company safer

While discussing how to protect yourself against trade fraud, one of our clients said: “I prefer dealing with a Hong Kong company, it’s safer, at least.” However, among all frauds I’ve heard about, half of the victims sent money to an HK account.

Safe or not depends on what kind of HK company it is. Typically speaking, a traditional HK company is set up by business people who base their company mainly in HK. However, because virtual offices are permitted for a HK company and little capital is needed to incorporate an HK company, there are two kinds of HK companies.

The first type of HK company is set up by business people in other jurisdictions, for the benefit of convenience, such as free flow of funds or nearly unlimited business activities. For example, many factories in Mainland China set up an HK company to do international trade. However, another situation is an HK company set up by fraud, the only purpose of the ‘so-called’ “ HK company” is to scam!

Dealing with an HK company is not a guarantee. If you are dealing with a HK company, you may pay a visit to its office, or pay someone to do so. Don’t make a full payment until the goods are to your satisfaction. These are useful ways to effectively protect yourself.