Is there a difference for export VAT recovery between a manufacturer and a company that purely buys and sells without changing the product in any way?
First let’s take a look at what is considered trading and what is manufacturing. And let’s assume that both the trader and the manufacturer are China based legal entities. As you correctly pointed out, for the trading companies, the items that come onto their books from their sub suppliers are the same items that are sold to their buyers. There is limited processing or added value that takes place while the items are on the books of the trading company. Same HS code/ product descriptions going in as going out.
A manufacturer on the other hand adds value. For example, the BOM (bill of material) is purchased from multiple sub suppliers and converted into a finished product under a new HS code.
Calculating the VAT rebate is fairly straight forward for the professional trading company, assuming they have all their licensing in place and keep their paperwork in order (not always the case with trading companies). In simple terms, when the trading company exports the goods out of China, they get a VAT rebate based on their pre-tax BUY price. Since the VAT rate for a tax payer of “normal tax payer status” is 17% and let’s say the VAT rebate rate is 15% and the with tax buy price from sub supplier was 100 rmb, it would unfold like this
100 rmb/ 1.17 X 15% to get the VAT rebate amount.
But it is very different for the manufacturer as there are two key calculations and the rebate they get is the LOWER of the two figures. To demonstrate, let’s assume the VAT rebate % is 15.
“Total BOM Value with taxes paid” divided by 1.17 X 0.15
“Invoiced Value to foreign buyer” X 0.15
Actual rebate given by the tax man is based on the lower of the two.
The notes above are sufficient to give the general overview, but know the it can get real tricky when you start to look at how the following items can affect the rebate rate for a manufacturer.
- how costs of logistics are entered into Invoiced Value?
- what happens if some of the BOM come from sub suppliers without formal receipts?
- what happens if services are part of the agreement along with provision of manufactured goods?
As you can probably tell by now, calculating the VAT rebate is as much an art as it is a science. While I encourage buyers to roll up their sleeves and get behind the bamboo curtain to understand VAT in China, for the average buyer, especially small and medium sized ones, at the end of the day, it is often the best idea to simply get the supplier to quote FOB China port and let the supplier sort out VAT on their own. Focus energy on twisting arms for the lowest FOB price. But as more and more buyers are looking to drive costs out of the supply chain, and understanding of VAT will probably become more essential, especially for the big buyers.
Couple additional points:
- Because the VAT rebate is based in the trading companies buy price from their sub supplier, many trading companies try to keep the VAT information away from the buyer’s eyes because it would give away their margins. This is one reason it feels like vendors in China try to intentionally make things confusing anytime you ask about VAT. Plus, if the vendor says they are a manufacture, but you learn that the VAT rebate is applied as described above, then you know you are dealing with a trader and not the real manufacturer.
- There are different rates and calculations for “small scale tax payer” and “normal tax payer” status. Above examples assume the seller is a normal tax payer.
- If you need help reviewing your specific situation or if you wanted to outsource your VAT processing/accounting in China, I would be happy to introduce you to reputable parties that can be of service.
Wishing you successful China sourcing.
China Operations Director, PassageMaker Sourcing Solutions
Chairman of the Advisory Board, China Sourcing Information Center