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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.

Any VAT rebate in China on tooling made here?

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Claiming VAT rebate in China

A foreign buyer of Chinese plastic products asks:

I am aware that VAT is applicable for the tooling owned by the customer at the supplier’s location in China to product a plastic part and export to Japan. Is there any option is available to buyer (Tool owner) to recover the VAT? If we request, supplier to amortize the tooling cost as piece price on manufactured goods, who will get benefit by VAT?

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Thanks for your question. If I understand it correct, the tooling will stay in China, but the product made from the tooling will be exported. If that is the case, then the tooling itself will not be exported and since it is not exported, there is no VAT rebate and thus no easy way to recover the VAT.

But, while it is in the gray area of tax code, sometimes the supplier will offer the tooling at a “w/out taxes paid and w/out official receipts” price. That could reduce the price a bit, and while it is common in China, technically it is not 100% legal as the supplier should be paying tax, but in practice, most suppliers don’t.

You should also be warned that it’s quite common that suppliers charge the overseas buyers for VAT, but they don’t actually pay the VAT and end up putting the money in their own pockets!

If you pay the supplier inclusive of VAT then they dance around and avoid showing you the receipts…then you know they are keeping the VAT. I’ve even seen supplier send fake receipts!

Why it’s a bad idea to amortize tooling and molds

BTW, you talked about amortization of your tooling. I would advise you to be very cautious. On my YouTube channel I explain why in more detail, but in short, if you amortize the tooling then technically you don’t own it. If something goes wrong and you need to pull the tooling from the supplier, you will find it very difficult to extract the tooling. In my contracts, I like to own the tooling outright from day one. You should also consider having the tooling looked after by a 3rd party. See Tool & Die steward service for reference.

VAT rebate in China and possible VAT leak issues

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VAT Issues when selling a made-in-China product to a China based customer

This question comes in from a client in the USA:

My Bill of Material (BOM) is made in China and we currently do our final assembly in HK and USA. We now have customers in Mainland China. I’m thinking about moving final assembly from our current assembly centers in HK and USA to mainland China in order to be closer to the customer. I’ve read a number of articles about VAT leak. Some of my preliminary calculations seem to suggest that the labor and rent savings available in China as opposed to our existing 3PL operation in Hong Kong would be offset by the VAT leak. I am certain my calculations could be misguided, so I would like to ask if you can explain the situation in detail.

In my calculation I was adding VAT 17% less VAT refund 13%. Maybe that’s a fatal flaw.

Are any of the PassageMaker fees/markups added to the suppliers cost to equal a new export value of the product and then the VAT refund of 13% is calculated on that higher value? If so, perhaps this helps with the China VAT refund amount but I think it would cause us to pay a higher import duty in the US. I hadn’t really considered that yet.

Additionally, for the global export business, would PassageMaker be named as the exporter? The answer to this question would determine if we have to consider contractual changes with our European clients.

VAT leak” is an informal term used by different people to mean different things. But the two most common interpretations are as follows:

VAT Leak- An inefficient processing of the VAT and VAT rebate, essentially giving the PRC gov’t more than needed. Overpaying on the VAT and under claiming the rebate. This type of “VAT leak” often happens when the party processing the VAT is not fluent in the process or lacks the infrastructure (example- only has the small tax payer status, lacks import/export rights or simply messes up the calculations/application).

VAT Leak- The VAT rebate in China ranges from 0 to the full 17% depending on how much the central government wants to promote a certain industry or product. When the official VAT rebate is less than 17%, sometimes this is called a “leak” because you pay in more than you get back. I personally don’t use the term “leak” in this situation because a leak implies that the plumber messed up and there is a hole in the pipe. Getting as much VAT rebate back as legally possible, even if less than the full 17%, isn’t a “leak”, it’s called “paying taxes”. Most people don’t say their checkbook leaks when they pay the IRS income tax each year, ha ha.

In my calculation I was adding VAT 17% less VAT refund 13%. Maybe that’s a fatal flaw. Are any of the PassageMaker fees/markups added to the suppliers cost to equal a new export value of the product and then the VAT refund of 13% is calculated on that higher value? If so, perhaps this helps with the China VAT refund amount but I think it would cause us to pay a higher import duty in the US. I hadn’t really considered that yet.

As the product delivered to your Mainland China-based end customer isn’t being exported out of China, this issue of a leak is not applicable as there is no VAT rebate on a domestic sale, but assuming you are looking at the impact of VAT on your global operation , then to answer your question, while we can’t legally change the VAT rebate, PassageMaker can certainly make sure you don’t have any VAT leak (in the first use of the term above) . We can do a case study for you if you could get some actual numbers to us. There are so many variables, so please give us actual data if possible. For example, off my head, here is what my accounting team will probably ask for:

  1. HS codes
  2. Annual volume (units and USD value)
  3. # of shipments in the year
  4. Supplier information
  5. Location
  6. Domestic sales license? In other words, do they offer “EXW with receipts” when they sell domestically
  7. In order to confirm the factory in China isn’t manipulating the pricing, it advantageous to ask for the price in three ways: EXW vs. FOB China Port vs EXW with Tax Receipt. But as that is a lot of work for the factory and they may take it the wrong way, it’s best to just give us what pricing details you have now for the case study and we’ll use that for the moment and did into more detail closer to actual placement of the PO w the factories.
  8. Destination information

For example, ship direct to client, or to FE HK or to FE USA? Do you wish to have the showcase assembly/QC area in SZ or HK?

For your reference, in terms of the Assembly and Inspection Labor taking place at PassageMaker, know that the labor rate is dependent upon the following variables:

  1. Annual volume
  2. Steadiness
  3. Space
  4. Amount of time needed per unit.

For example, let’s say that in a year X units are exported using Y total man hours. If all the units ship once per year (like a Christmas rush) this is a lot more expensive to coordinate (due to HR issues, OT, planning, space…) than a situation where X/12 goes out steady each month and I can assign a small group of staff to work full time on the project. If you can give us your latest details of ABCD on a global level, we may be able to get the costs lowered a lot. We could look at this while we are looking into the VAT issue above as the two go hand in hand.

 

Additionally, for the global export business, would PassageMaker be named as the exporter? The answer to this question would determine if we have to consider contractual changes with our non-China based customers.

 

Assuming PassageMaker is coordinating the exportation out of China, then PassageMaker is the exporter of record. But the importer of record into the destination is a bit more flexible. For example, the paperwork can be adjusted in HK or even via your company in USA.

But please know that if delivery is done via your company in USA, your subsidiary in HK or via an entity you control anywhere outside USA for that matter, then you would have tax exposure with the IRS. Consult your tax advisor in USA, but as I understanding it, PassageMaker is very much as arm’s length from your company (as there is a contract, not cross ownership), so it is probably in your best economic interest to have the paperwork flow under PassageMaker’s name. even if you appoint PassageMaker as the processing agent, to let your clients know you have skin in the game and real responsibility for the supply chain, you could sign an agreement with your customers that you still give guarantees regarding quality, IPR and such. In this fashion your clients know you and PassageMaker stand behind the products, but you are minimizing global tax in a fully legal fashion, thus keeping overall costs down for you and your clients.

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Related Content:

Click here for other PassageMaker articles on the subject of VAT in China.

VAT rebate in China: Reclaim on sales to China?

VAT rebate in China Reclaim on sales to China

Jose wrote in with and interesting question about how the VAT rebate in China is processed on goods that are imported into the mainland. My focus is on exporting out of China, but as I deal in VAT everyday, I offered the following comments to Jose. I welcome feedback to confirm if my assessment is accurate.

Jose writes:

I would like to import China Espresso Making machines and Coffee from Italy.
Can your office provide import agent and logistics services?
My main question that I would like to ask of you is that when the Import Duty and the VAT is paid during the importation process at what point if any can I get a VAT Rebate?
I have been informed that I can get a VAT Rebate when the product is sold in the Chinese market, Is that correct? Please, help me clarify this point. Thank you in advance for your assistance.

My response:

While our niche at PassageMaker is helping buyers source products from China, our import-export license can be used to import products into China and manage the logistics. Can you give me some idea as to the scale of your coffee project (for example, do you already have buyers and steady orders, or just getting started?) and I would be happy to put the right person in touch with you from my organization to talk about how we can be of service.

Regarding the VAT, you are correct that import duty and VAT is paid upon importation into China. I am afraid that whoever told you that you can get a VAT rebate when the products are sold in China did not give accurate advice. But China is a big place and the laws change, so perhaps the person that gave you that advice knows something that I don’t. The following is my understanding, but if your advisor knows different, please let me know as I too would like to stay up to date.

As I understand it, the VAT rebate is applied for when good leave China. For example, if you were a China based legal entity (fully licensed to do trading and process VAT) and imported coffee and machines into China from your supplier in Italy, then sold the items to buyers outside of China, then MAYBE there could be some VAT rebate. But in the situation you describe above where you are selling to the China market for end use in China, there is no VAT rebate that I am aware of.