What do you know about China accounting? Probably not that much.
What do you know about VAT tax in China? Most foreign companies entering China would probably say, “Very little. It must be similar to the West, right?"
Well, the similarity is that China does have VAT, but the similarities really end there I’m afraid.
VAT in China is notoriously complex and difficult, and so in this blog post we’re going to introduce and explain this important element of China accounting for your consideration so, no matter if you’re planning on entering China, or are already operating here, you have a better knowledge of this thorny topic…
What are the rates of VAT in China?
Well, most countries charge Value Added Tax on products and services sold, imported, etc, so as progressive and modern country it’s no surprise that China follows suit.
However, as is typical with China a lot of the time, VAT here tends to be rather complex.
Here are the rates of VAT in China:
- General VAT on sale, imported, processed, installed, and repaired is 17%.
- Heating, paper, and food products are taxed at 13%.
- Selected specific industries, such as R&D and technology, cultural creativity, IT, logistics auxiliary, and broadcasting, film, and TV only pay 6%.
- Certain small-scale tax payers only pay 3%.
- Transportation services provided from a Chinese company to a foreign company is charged at 0%.
How is VAT paid in China?
As in many countries, VAT tax in China is added at each step throughout a supply chain through which a product (or service) progresses through towards its end user. Each time a product is enhanced, adding value, more VAT is added and must be paid.
Are there any tax exemptions or rebates to know about?
Tax rebates are most commonly focused on exports. This makes sense, as until very recently China has derived a great deal of its industry and income from foreign companies who have sought to use its people and facilities for manufacture of products to be shipped overseas.
However foreign companies who manufacture for export in China oftentimes don’t even know that they’re eligible to gain a refund on their products as they’re exported!
What’s more, in the case of working in partnership with Chinese exporters in order to get your products to you abroad (which many foreign companies do instead of setting up their own exporting operations in China), the local companies will often not disclose the fact that they gain a VAT rebate on the exported products, charging them the full cost and pocketing the rebate themselves!
Mike Bellamy at Passagemaker China warns:
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 an 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.
It is common that the exporting company may apply to be granted a VAT rebate once the products have been exported as long as they can supply their customs declaration, export invoice, export of foreign exchange check-offs list and other official information related to the export. So no matter if you are exporting directly yourself through your China WFOE which has an import export license, or you’re working with a local export company to handle this for you, you need to know the impact of the possible VAT rebate on your bottom line!
Many foreign companies don’t know how to apply for their tax rebates, if they’re eligible at all, and whether their products are eligible for a full refund or only partial (both exist).
Transparency and understanding are two key issues affecting all foreign companies operating in China. Where do you go for decent advice that you can rely upon?
Well, you need to have a trusted accountant either on your team, or at least to offer advice to. If you’re working with an export agency to get your products overseas you need to have a transparent relationship with them in order to be assured that they’re not undermining you.
Want to get a free consultation from our China accounting and tax experts and discuss your VAT? Click below:
Knowledge is power.
If you’re a manufacturer and exporter in China, the Chinese VAT rebate is one of your greatest weapons, as it allows your products to gain more profit and remain competitive abroad, which is really the distillation of why many foreign companies choose to manufacture in China in the first place.
The problem is, did you know you can actually gain the VAT tax in China back as a rebate?
Weekend Reading In Detail…
Obviously a lot of time can be spent on VAT in China, and this blog serves as an overview to make foreign companies aware of some of the main points. To get more detailed information, this white paper on China VAT for exporters offers a great deal of value (although is not short form).