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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.

Example:

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!

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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.

Compliance

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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.

Regulatory Compliance in China: Questions Importers Must Ask!

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Regulatory Compliance in China Questions Importers Must Ask

One of my good friends is a compliance officer in the US headquarters of a major international brand. He is responsible for making sure the products his company imports are safe and meet corporate, market and governmental standards.

He is also the go-to-guy in his company when there are problems with quality and safety issues. He asked not to be mentioned by name, but was kind enough to let me share with you the following insider information about regulatory compliance in China.

Readers of my blog typically have two types of concerns when it comes to compliance:

Import/Customs Clearance and Compliance

Import/Customs compliance into US/EU/AUS to make sure they have all the right paperwork and forms filled out. That’s fairly easy to arrange but the next part is harder…

Regulatory Compliance & Safety

While importers may bring in all sorts of different product, from electronics to furniture, they all have concerns about regulatory/safety compliance. The labs are pretty good at saying “you need to test this product in the following ways to ensure the SAMPLE is compliant”, but these buyers are left in the dark when it comes to how to set up a Compliance Program to ensure that if, God forbid, some customer got hurt and the courts asked the importer to explain their compliance system, the importer would be covered. It’s not enough to say “I sent the sample to the lab” because the lawyers will say “that’s just one sample, how did you confirm there was not a change to form, fit, function that could impact safety of the product when production was taking place at the supplier or even sub supplier level?” So these importers need help setting up a comprehensive system that coordinates documentation, sample collection/testing and monitoring of the Chinese factories.

Regarding Import/Customs Clearance and Compliance

Importer should also make sure they get the legal requirements down to the country and even state level, especially in the US there are many state laws. For example, the product could get in to the country legally, but then be found to be illegal in a certain state.

Regarding Regulatory Compliance and Safety

This side of things is much harder since you have to make sure all the products coming off the production line in China are really the same as the approved sample. And most important, that approved sample need to be compliant!

The easiest option, but perhaps the more costly optional, is having a product certified compliant, that assumes an appropriate certification exists! Certification encompasses the product design (usually you need to provide the product specs and design), testing and also periodic audits and reviews. Again, it will cost more if the category is optional and there are many categories that don’t have any certification at all.

Without certification, the way to tackle it is to make sure you have setup a procedure on how and when products are tested and inspected. From the physical testing/ safety side you’ll want products tested on each design, and from chemical side you’ll want a test anytime the material changes and at a minimum once per year.

If you’re using factories where you don’t have full trust or transparency (meaning you can’t be sure about their material), you’ll probably want to have a product tested each production run at least on the chemical side. If you have full control of the material you’ll want to test in coming material and probably randomly select finished product since sometimes the manufacturing process can add restricted chemicals.

You should also look at how samples get to the lab. If the supplier sends the samples rather than having a buyer representative pick them up, then there is risk that the supplier will send a “golden sample” which is sure to past the lab test, but may not represent the quality of the products coming off the assembly line!

Regardless, at the very least, you need a well-documented process of what you do when, and make sure you follow it and keep all papers. God-forbid there is a recall or legal action, if you don’t have a well-written process, you will find it hard if not impossible to win a court case. This needs to be considered part of doing business, if the buyer wants to be in the import-export game!

How about product recalls?

It’s essential to understand the requirement for a recall. If you do get customer complaints about issues with the product, there are requirements with what you need to do especially if anyone gets hurt. So there should be a process in place for a recall, and you need to have good tracking of all products and where they are in the supply chain.

Any other things we should be asking about in terms of compliance?

One other item to consider is social compliance. Making sure the factories are audited and comply. More and more there are also environmental audits requested by major retailers. So you have to worry about that as well.

Regulatory Compliance in China: Questions Importers Must Ask!

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Regulatory Compliance in China Questions Importers Must Ask!

One of my good friends is a compliance officer in the US headquarters of a major international brand. He is responsible for making sure the products his company imports are safe and meet corporate, market and governmental standards.

He is also the go-to-guy in his company when there are problems with quality and safety issues. He asked not to be mentioned by name, but was kind enough to let me share with you the following insider information about regulatory compliance in China.

Readers of my blog typically have two types of concerns when it comes to compliance:

Import/Customs Clearance and Compliance

Import/Customs compliance into US/EU/AUS to make sure they have all the right paperwork and forms filled out. That’s fairly easy to arrange but the next part is harder…

Regulatory Compliance & Safety

While importers may bring in all sorts of different product, from electronics to furniture, they all have concerns about regulatory/safety compliance. The labs are pretty good at saying “you need to test this product in the following ways to ensure the SAMPLE is compliant”, but these buyers are left in the dark when it comes to how to set up a Compliance Program to ensure that if, God forbid, some customer got hurt and the courts asked the importer to explain their compliance system, the importer would be covered. It’s not enough to say “I sent the sample to the lab” because the lawyers will say “that’s just one sample, how did you confirm there was not a change to form, fit, function that could impact safety of the product when production was taking place at the supplier or even sub supplier level?” So these importers need help setting up a comprehensive system that coordinates documentation, sample collection/testing and monitoring of the Chinese factories.

Regarding Import/Customs Clearance and Compliance

Importer should also make sure they get the legal requirements down to the country and even state level, especially in the US there are many state laws. For example, the product could get in to the country legally, but then be found to be illegal in a certain state.

Regarding Regulatory Compliance and Safety

This side of things is much harder since you have to make sure all the products coming off the production line in China are really the same as the approved sample. And most important, that approved sample need to be compliant!

The easiest option, but perhaps the more costly optional, is having a product certified compliant, that assumes an appropriate certification exists! Certification encompasses the product design (usually you need to provide the product specs and design), testing and also periodic audits and reviews. Again, it will cost more if the category is optional and there are many categories that don’t have any certification at all.

Without certification, the way to tackle it is to make sure you have setup a procedure on how and when products are tested and inspected. From the physical testing/ safety side you’ll want products tested on each design, and from chemical side you’ll want a test anytime the material changes and at a minimum once per year.

If you’re using factories where you don’t have full trust or transparency (meaning you can’t be sure about their material), you’ll probably want to have a product tested each production run at least on the chemical side. If you have full control of the material you’ll want to test in coming material and probably randomly select finished product since sometimes the manufacturing process can add restricted chemicals.

You should also look at how samples get to the lab. If the supplier sends the samples rather than having a buyer representative pick them up, then there is risk that the supplier will send a “golden sample” which is sure to past the lab test, but may not represent the quality of the products coming off the assembly line!

Regardless, at the very least, you need a well-documented process of what you do when, and make sure you follow it and keep all papers. God-forbid there is a recall or legal action, if you don’t have a well-written process, you will find it hard if not impossible to win a court case. This needs to be considered part of doing business, if the buyer wants to be in the import-export game!

How about product recalls?

It’s essential to understand the requirement for a recall. If you do get customer complaints about issues with the product, there are requirements with what you need to do especially if anyone gets hurt. So there should be a process in place for a recall, and you need to have good tracking of all products and where they are in the supply chain.

Any other things we should be asking about in terms of compliance?

One other item to consider is social compliance. Making sure the factories are audited and comply. More and more there are also environmental audits requested by major retailers. So you have to worry about that as well.

What I told CNN about China sourcing

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What I told CNN about China sourcing

I was recently interviewed on camera by CNN at the Global Sources trade show on the topic of what buyers need to know about China sourcing. They put me in the hot seat by asking “give our viewers the 5 most important tips for successful China sourcing” and do it in 30 seconds or less! I wrote a 300 page book on that very topic, so I have plenty of tips, but picking the top 5 and explaining them in just 30 seconds with no chance to prepare was a little intimidating. I must have said something right as CNN aired it right away!

Here are my 5 tips as given to CNN:

Selecting the right supplier upfront is the single most important step in the sourcing process. Starting a relationship with the wrong supplier can be catastrophic. So do your due diligence and verify your supplier BEFORE you place the purchase order.

Use your research skills not your negotiation skills to get a good price/ quality/lead-time. If you know what the fair price in China is for a given widget, you can use that leverage to get a good price from your verified supplier.

Link payments to supplier performance. You may have to give a deposit, but subsequent payments should only be made once the seller achieves pre-agreed targets for ship dates and quality standards. For example, final payment could take place AFTER the final inspection is done by the buyer’s representative.

Make sure the name on the contract matches the name on the bank account and the business license at the production site. If you send money to one account and sign a contract with a different legal entity, good luck getting your money back if things go wrong. Many buyers don’t pay attention to the details and end up sending money to a private account or to a holding company rather than direct to the factory.

Be more than a PO# in the eyes of the supplier. Sell them on why you are a good partner worth of respect. If the supplier can grow with you and likes you as a person, you will find advantage when it comes to lead times, payment terms and quality.

What 5 tips would you suggest to CNN?