How to recover VAT on exports in China?
Value Added Tax (VAT) is an indirect tax, a form of withdrawal to the state budget of a part of the cost of a product, work or service, which is created at all stages of the production process of goods, work and services and is paid to the budget as it is sold. Simply put, VAT is a tax that is paid by the taxpayer with its own markup (value added). This tax is the main source of revenue for the state budget.
The state, depending on the rate and profitability of the budget, as well as macroeconomic factors, can change the VAT rate, both upward and downward. When exporting products, VAT is the main source of income for a Chinese trading company or plant. In order to stimulate the export of various goods, different interest rates for VAT refunds can be applied: in China they vary from 0% to 17%. High tax rates are used for high-tech products that stimulate the creation of new jobs and the development of technology.
What is the payment and reimbursement of VAT when exporting goods
VAT return by the state when exporting goods abroad compensates the exporter for the lack of outgoing VAT and reduces the tax burden. The state may apply various VAT refund rates as well as protective duties (mainly for deficient raw materials) to encourage or restrict the export of certain categories of goods. High VAT refund rates are applied to high-tech products, equipment, as the export of such categories of goods abroad contributes to the development of knowledge-intensive industries and the creation of jobs.
- The company must be registered in mainland China, not in Hong Kong or Macau;
- The company should work on the terms of the general taxation system, that is, with VAT (一般纳税人). Companies running a simplified system(小规模纳税人), will not be able to return the VAT. You can check this by asking the seller for a license for commercial activities. (it reflects not only the taxation system of the company, but also the size of the authorized capital, legal address, name of the owner, the company’s areas of activity, all you need to know about the company before you start working with it) and a certificate of registration in tax (税务登记证);
- You must have an export license (对外贸易经营者备案登记表), be registered with customs (海关登记证);
- Having foreign exchange earnings from another non-Chinese jurisdiction - the fact of receiving foreign exchange earnings from abroad proves that the transaction is export.
- Have an invoice (s) with VAT (增值税发票), confirming the purchase of goods within China, that is, to have confirmation of the input VAT.
- Have a customs declaration (报关单), confirming that the goods were customs cleared and sold abroad.
- It is very important that the data on the product (name, marking, trademark, measurement unit: pieces, sets) in the customs declaration coincide with the similar data in the Chinese invoice. Otherwise, the tax will refuse to return the VAT..
After exporting the goods, it is necessary to collect a package of documents for VAT refund (invoice and customs declaration) and submit it to the tax. Tax, depending on the class of the exporter (class 1, class 2, class 3), verifies the authenticity of the invoice (there is a counter request to the tax producer who issued the invoice, checks whether the goods were delivered), checks the data customs, checks through currency control receipt of foreign exchange earnings, etc. Based on the results of the audit, a decision is made to return the VAT.
Export pricing in terms of Chinese VAT refunds
In order to understand the pricing issues when exporting products from China, it is necessary to conditionally divide manufacturers and exporters into groups:
Group No1. Large and medium-sized industrial enterprises that have the opportunity to export independently or operate through their own export subsidiaries. As a rule, such companies, in setting prices on FOB terms (or on other terms of Incoterms 2010) in dollars, can immediately or fully deduct export VAT from the price. Thus, they offer prices on the domestic market with VAT, and on the external market - with the deduction of VAT or part of it.
Checking the attractiveness of the price in RMB is simple: compare the price on FOB terms in dollars with the price in RMB including VAT. Knowing the VAT refund rate, it is easy to calculate which price is more attractive.
Group No2. Medium and small industrial enterprises that also have export rights and are actively working with Chinese export companies that bring them customers. At such enterprises, the price on FOB terms will be the same as in RMB with VAT, or even higher. They regard export VAT as an additional bonus from the Chinese budget, and not as the main source of income, preferring to work through friendly export companies that return VAT to themselves.
Group No3. Medium and small-scale producers who do not have their export right can sell only to the domestic market and only with VAT, provided that they operate on a common tax system. These companies do not have the opportunity to give the export price on the terms of Incoterms. They provide reasonable prices and VAT "as a gift" when exporting. However, it is difficult to find such plants on the market.
Group No4. Export companies that are not manufacturers. Such companies export and refund Chinese VAT in full.
The refund amount is calculated using the following formula:
VAT refund amount = Sum of goods in RMB with VAT / at 1.17 * on VAT refund rate (0.17, 0.15, 0.13, 0.09, 0.05 - depending on the group of goods).
For example, a product costs 100 yuan including VAT, the return rate is 17%. 100 / 1.17 * 0.17 = 14.5299. It turns out that the budget can return 14.5299 yuan.
Сроки возврата НДС
If you do not take into account the exporters of the first category (which include large state-owned companies with huge amounts of VAT to be reimbursed), the deadlines for the reimbursement of export VAT are 3-6 months from the date of export of the goods. These deadlines can be extended if the company is caught in bad business.
In real life, there are many nuances when returning VAT on exports. We advise you to enlist the support of a professional Chinese accountant who has contacts with the tax authority, and when customs clearance of goods, properly file documents and through a broker to control the situation at customs.