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

vat2 284x300

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.

vat2 284x300

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.

Any VAT rebate in China on tooling made here?


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?


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


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.

vat adds up

Related Content:

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

VAT rebate in China: Buyers, save more!

VAT rebate in China Buyers save more

China Daily ran an interesting article with the headlines “Export tax rebates will be increased this year in response to an export decline triggered by the European debt crisis”. Below are highlights from the article with my clarifications on how these items affect buyers and how we can take advantage of this opportunity.

In order to prop up sagging exports the Chinese Commerce Ministry stated that China will:

“at the appropriate time, increase tax rebates on specific categories of goods, including labor-intensive products”.

This is not the first time China has adjusted the rebate system.

“From 2008 to 2009 when the financial crisis hit, China raised export tax rebates seven times on a wide range of goods. Tax rebate rates in general were increased to 13.5 percent in 2009 from 9.8 percent before the crisis.”

The rebate referred to above is the VAT rebate. You may be interested in checking out What is VAT and why should I worry about it? to understand how VAT rebate in China works.

“Higher export tax rebate rates would help us get through the difficult patch and prevent the hardest-hit from going bankrupt…”

explains a China factory. This “bonus rebate” is essentially the central government subsidizing production costs. This is great for us buyers of Chinese exports IF the rebate is passed on to us. But from my experience, unless the buyer knows about the rebate and twists the arm of the seller, the suppliers are likely not to pass on the savings to the customer.


At the time of writing it has not been made public which industries will receive the extra tax rebate. But it is very positive that the government is hinting the list will include labor-intensive products which make up the bulk of Chinese exports. As soon as the list is made public, I will post the information to my blog and suggest readers who are buying these products from China use this “inside information” to negotiate better pricing with their suppliers. Get ready to twist some arms!

The article also went on to explain:

“Relocation has proven to be an effective tool in slashing costs for exporters. Wenzhou-based shoe maker China Juyi Group has moved some of its manufacturing lines from Zhejiang (on the coast) to Anhui province (in the interior) , where labor and land costs are lower. Many enterprises in Wenzhou are doing the same while costs in the eastern coastal areas surge,” said Luo Li, Juyi’s deputy general manager.”

Unfortunately, factories can’t pick up and move overnight. Yes, in the long run (2-5 years) more and more factories will move inland to help keep costs down. But the short term rebate increase from Beijing is a move that helps right now. So, on behalf of us buyers who are able to get concessions out of the sellers for this rebate, we should say “XieXie Beijing!”

Related blog posts:

Central government to bring down costs of logistics. Good news for sourcing industry.

Reports of China’s death as a sourcing destination are highly exaggerated.

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.

Understanding VAT in China: Today’s perspective on the 2007 changes

Understanding VAT in China Today's perspective on the 2007 changes

Douglas in the USA wrote in with the following question:

“I’m having a little difficulty understanding VAT in China and which products are eligible for VAT rebate. In 2007 there were a lot of products who’s VAT rebate was changed. Is there somewhere where I could find this list to see which VAT rebates at export from China were reduced?”

I can get the list of the 2831 items in Chinese, but I have not found it in English yet. But to help answer your question, here are the key items to keep in mind when looking back at the 2007 VAT rebate change.

1. The big announcement in 2007 was known as “Circular 90” and affected (reduced or eliminated VAT rebate) on 2,831 types of items in the following areas:

  • Garment and textile articles
  • Electrical and mechanic appliances
  • Construction materials
  • Base metals, minerals and their products
  • Chemical products
  • Animal and vegetable products

2. The items above were considered “un desirable” by Beijing because they were high-energy consuming or had pollution issues. Also the very low tech industries got squeezed as China hoped to use the VAT restructure to encourage businesses to move up the value chain.

3. Soon after Circular 90 went into effect, the Global Financial Crisis hit and in order to stimulate exports in a slow global economy, Beijing backtracked on some of the 2007 adjustments made to the VAT rebate system.

4. In 2010, there was another round of changes but not as sweeping as 2007.

5. So if you desire to know “what is the VAT rebate rate on a given HS code at present”, you can’t assume that the 2007 rate is still in place today. If you have some specific HS codes, I would be happy to look them up for you.

Understanding VAT in China: Who pays?

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?

VAT rebate in China: Scams exposed!

VAT rebate in China: Scams exposed!

This post is based upon a recent question that came in to our mail bag. To protect the sensitive nature of the individual in question, we have changes the names and product, but the issues concerning VAT discussed below are be applicable to buyers of any product coming from China.

Question: We are a wholesale manufacturer/importer of hand-woven textiles. Our tapestries are all 100% wool. We are using a new export company and we are not sure if we can trust the information they are giving us, because it is quite different from previous years.

1. What is the VAT rebate rate for these products?

2. What percentage of the VAT is retained by the export company, and what percentage goes to the factory?

3. The export company is telling us that since they are a new company and all export companies must show a profit to be eligible for the VAT, that they need bill us an extra 17% on each shipment. They are telling us that we will be reimbursed this amount in the coming months once they have applied for and received the VAT. Does this make any sense?

Any advice or help would be greatly appreciated.

My Response

Before you read my comments, as a primer on what we will talk about below, I encourage you to read my article “What is VAT and why should I worry about it?”  if you have not done so already.

My co-worker in the China office where I am based, who is a licensed customs broker, looked up that your products have a VAT rebate rate of 16%. If we know your HS code we can confirm for sure, but based on the information you have given me so far, I think the 16% is accurate.

In China, every aspect of a trade is up for negotiation. There is no law or even industry standard that dictates how much of the VAT is retained by the export company and how much, if any, is shared with the factory and/or buyer. I’ll explain more in my answer to your #3 question.

For many of the early years of my China career I banged my head up against the VAT wall, but after a lot of research and the experience of setting up multiple businesses in China that have import-export rights and VAT licensing, I now have fairly unique understanding of the situation you describe above.

A few months ago my book, The Essential Reference Guide to China Sourcing went to press. Based on your situation, I think you would gain a lot from reading my book, but in the meantime, to help answer your question, I’ll draw upon some lessons learned over the years of doing VAT and pull some tips from the guide book to help explain what may be going on at this Chinese company as well as give you some pitfalls to be aware of.

“New company”

The VAT rate of 16% mentioned above assumes the exporter has achieved what is called “normal tax payer status” in the eyes of the Chinese government. As I understand it, and have experienced setting up PassageMaker, when a new company is set up, they are on a kind of VAT probation for the first year under what is called “small tax payer statues”. And during this probation period, a much lower % of rebate is applicable. In my experience, the probation period last about a year assuming the business achieves a stable and larger scale of business. Some small companies remain small tax payer forever.

“all export companies must show a profit before factoring in VAT”

I believe that technically the laws here imply that a business should be profitable before VAT rebate in China is returned. But in practice, because the margins are so tight for most exports, a huge number (I am guessing the majority of suppliers) don’t make any real profit until the VAT rebate is returned. So it is a bit of stretch for your exporter to say they need to bill you an extra 17% and rebate you later. I suspect this is just a negotiation tactic which leverages the gray areas around VAT to build in hidden margins for the exporter.

VAT rebate in China: Scams exposed!

Pitfall 1

I am interested to learn how the supplier says they would actually pay you the VAT rebate once it comes back to them from the government. If they are running a PRC compliant set of books, it is not easy to legally send you funds overseas. I am betting they told you they would simply give you a credit on the next order. Sounds nice, but what happens if you don’t have future orders with them for whatever reason. You may find your funds are stuck in China with no recourse.

Pitfall 2

No tax agency/ government anywhere in the world gladly gives refunds. In China, especially for new or inexperienced exporters, it is a real paperwork nightmare to submit the supporting docs for the VAT rebate to the government. And the scary part is that the government has the right to say “sorry you filled this minor point out wrong, so no rebate for you on this order, thanks, try again on next order.”

If your supplier messes up the paperwork or doesn’t have good communications with the local government to sort things out, do you think the supplier will stand behind their promise to send you money or do you think they will just say “we didn’t get any money back, so we have no refund to give you”. Happens all the time.

Pitfall 3 “the partial refund”

I talk about these tricks of the trade in my book in detail, but here is the scam in short. Let’s say the rebate rates that the supplier gives you checks out at legit, and for the course of example, let’s say it turns out the VAT rate for this product should be 13%. Let’s even go so far as to say the supplier does indeed give you 13% back at the end of the process. Sounds pretty fair doesn’t it?

But what you may not realize is that in China the interpretation of the rebate amount can vary from port to port and from one tax official to the next. It is possible that a rug for home use has a 13% discount, but the same rug used in a hospital gets a full 17% as the government wants to promote so called high end exports like medical.

I have witnessed cases where the supplier tells the buyer the rebate is 13%, and the customs book also states 13% for the given HS code. BUT behind closed doors the supplier persuades the local officials at the port that the product is actually a different HS code or a different use (medical for example). Or perhaps via an under the table payment to the official, they get the rate set at 17%. The supplier keeps the difference and the buyer never knows.

You are not alone.

A N. American company was spending millions USD each year with a supplier. They had been doing business for 15+ years with that supplier in China. They had the tightest of margins negotiated and even got price concessions downward each year with the vendor. They knew the BOM and labor rates down to the cent, but for the life of them, the buyer could not figure out how the supplier had the cash to buy 2 new Porsche Cayennes, a new home and send the kids to university in Switzerland. That buyer smelled something fishy and hired us for a quick VAT study.

It was pretty clear from our research that the supplier has some hidden VAT rebate %. With that knowledge the buyer renegotiated with the supplier, moved some production to another source and had PassageMaker process all the VAT rebates for the buyer’s exports during the 2 years that the buyer needed to set up their own office in China to process under their own VAT license as suggested in the VAT study conducted by PassageMaker. This advise probably saved the client millions of USD over a 4 year period.

Some possible solutions for you to consider:

Explain to this trading company that you realize the VAT is a very complex subject and you like to keep it simple. Ask them to quote a “FOB nearest China port” price and any VAT issues are their problem. Under FOB, the price is already inclusive of VAT.

Do you have any back up suppliers that can provide you the goods without all the drama?

Do you happen to know the actual manufacturer? Perhaps the manufacturer has an export license already and doesn’t need the trading company. So often the trading companies tell you they are essential to the exportation, but quite often that is an exaggeration and trick to keep you from going direct. Not only could your exporter be pocketing some hidden VAT rebate, but they may even have a hidden commission with the actual manufacturer.

My sales team will be upset with me if I spend an hour on this email and fail to mention how PassageMaker can help. So putting on my salesman cap… perhaps you would consider the services of a 3rd party like to help research and find a more suitable supplier in China and/or process the VAT under our company in a transparent and trust worthy fashion. Happy to give you references of clients we have helped out of China VAT jams. Sorry to slip into sales mode, but I wanted to let you know we can help if you need support.

Sorry for the long post, but I get very passionate, maybe patriotic, when it comes to helping other Americans avoid being taken advantage of in China.