Value Added Tax (VAT) in China is notoriously complex. It’s one of the most comprehensive among the 170 countries that have implemented VAT (or equivalent tax). The difference between Chinese accounting standards and the West is that China adopts a multiple VAT rate system where the rate depends on the industry.
Whether you are entering China or already operating here, this blog post will guide you to better understand the China VAT tax system in 2021.
How is China VAT Tax Paid?
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.
What Are the Current China Taxation Rates?
Since 1 April 2019, the standard rate of VAT is 13% for all VAT taxpayers. However, the applicable VAT rate for general VAT payers depends on the industry. Breakdown of applicable VAT rates per industry can be found in the table below.
|Industries||Applicable VAT Rate|
|Sales and importation of goods||13%|
|Provision of repairs, replacement, and processing services||13%|
|Tangible movable property leasing services||13%|
|Sales or importation of necessity goods (e.g. agricultural products, water, gas)||9%|
|Transportation services, postal services, basic telecommunications services, construction services, immovable property leasing services, sales of immovable properties, transfer of land-use right||9%|
|Value-added telecommunications services, financial services, modern services (except for leasing services), consumer services, sales of intangible properties (except for land-use right)||6%|
Information is from PricewaterhouseCoopers 2021 Tax Summary
China has also extended preferential VAT policy for small-scale taxpayers from 1 March 2020 to 31 December 2021. The reduced VAT rates are intended to provide tax relief to small size businesses in China due to COVID-19. Small scale taxpayers may be subject to a tax deduction of 1% instead of 3%.
China VAT Tax & Rebates: What You Need to Know
Tax rebates most commonly focus on exports. Until recently, China has derived a great deal of its industry and income from foreign companies who have sought to use its people and facilities to manufacture products to be shipped overseas. However, foreign companies which manufacture for export in China often don't even know that they're eligible to gain a refund on their products!
Furthermore, when working with Chinese exporters to get your products abroad (as many foreign companies do rather than setting up their exporting operations in China), the local companies will often not disclose that they receive a VAT rebate. This is so that they can charge the total cost and pocket the rebate themselves.
Commonly, the exporting company may apply for a VAT rebate once the products have been exported. They can supply their customs declaration, export invoice, export of foreign exchange check-offs list and other official information related to the export. Whether you are exporting directly through China 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.
Is my Wholly Foreign-Owned Enterprise (WFOE) in China eligible for VAT exemptions?
The short answer is yes - VAT can be deductible for WFOE companies. However, you have to meet several criteria to be eligible for VAT exemption. We have listed the 2 main criteria below:
1. WFOEs must be registered as general taxpayers
China's tax system has two types of VAT status: small-scale taxpayers and general taxpayers. Small taxpayers are companies in China with annual revenue below 5,000,000 RMB. These companies are subject to 3% VAT. However, VAT is not deductible if you are a small-scale taxpayer and becomes a direct cost to your business.
Once the company has received the general VAT taxpayer status, VAT can be deducted, which can benefit tax control.
2. Only special VAT fapiao can be used for VAT deduction
There are two significant categories of fapiao – general fapiao and special value-added tax (VAT) fapiao. Only special VAT fapiao can be used for tax deduction purposes, while general VAT fapiao is only used to provide evidence of a payment or transaction.
For more information about the different types of fapiaos, visit What Your WFOE Needs to Know About China’s ‘fapiao’ Invoice System.
Many foreign companies don't know how to apply for their tax rebates or if they're eligible at all, and whether their products are eligible for a full refund or only partial (as both exist). Where do you go for decent advice that you can rely on?
Well, you need to have a trusted accountant either on your team or at least to offer advice. If you're working with an export agency to get your products overseas, you need to have a transparent relationship with them to be assured that they're not undermining you. Hongda provides Chinese accounting services to handle your daily and monthly Chinese accounting, apply for tax rebates and handle VAT on your behalf.
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