VAT refund in China

Obtaining refunds on Chinese VAT for importers is China Money’s main objective and service.

To start, let’s discuss VAT itself.

Value-added tax (VAT) is an indirect tax, a way to funnel part of the cost of goods, work, or services into the state budget. This tax is levied at all stages of the production of goods, work, and services, and is input into the budget as it is accumulated during this process. In simpler terms, VAT is a tax paid by the taxpayer from its markup (value added). This tax is a significant source of revenue for the state budget. Some countries like the U.S. don’t have VAT, using sales tax instead, but a majority of countries do, and it is a major tax burden for business. The government, depending on the health of its budget as well as macroeconomic factors, can change the rate of this tax, either raising it or lowering it, and these changes have an immediate impact on the economy. The VAT in China is 17%.

How is VAT paid and refunded when goods are sold within the same country?

When goods or services are sold within the same country, over the course of a quarter, a company generates input VAT – this is VAT that the company pays to sellers when acquiring goods or services, as well as output VAT – this is VAT the company receives from buyers of its products.

At the end of the quarter, the company pays the difference between output and input VAT to the government, or, if the input VAT was greater than the output VAT, the company applies for a VAT reimbursement. This refund system is quite common, and illustrated by the following example: a company buys a large amount of goods to stock its warehouse, but only manages to sell a small portion of the total in the course of that quarter. Therefore, the company’s input VAT will be several times that of its output, and it should submit documentation for a VAT refund. 

How is VAT paid and refunded when goods are exported?

When goods are exported, the exporter only generates input VAT when purchasing the goods on the domestic market for further sale abroad; when the goods are sold on the international market, no output VAT is formed. This creates a situation where the exporter, despite not being the end consumer, pays the government VAT on the total cost of the goods, not the markup. Therefore, state VAT refunds on exported goods compensate the exporter for the lack of output VAT and reduces its tax burden. The government can encourage or restrict the export of certain categories of goods by setting varying VAT refund rates (in China, those rates are 0%, 5%, 9%, 13%, 15%, 17%), or imposing protective tariffs (mainly on raw materials in short supply). High VAT refund rates are usually set for hi-tech products and equipment, as the export of these products fosters the development of technology-intensive manufacturing and the creation of jobs.

The process for VAT refunds on exports in China

Here is an overview of the conditions necessary to receive a VAT refund in China:

• the company must be registered on mainland China, absolutely not Hong Kong or Macau. (If an offshore company offers its services to get your company a VAT refund, you must understand that they will only be an intermediary in the deal, since they have no rights to refund Chinese VAT. That procedure can only be carried out by a company with PRC jurisdiction);

• the company must work within the general taxation system, that is, with VAT (一般纳税人). Companies working under a simplified system (小规模纳税人), can’t refund VAT. You can determine this by requesting the seller’s business license (营业执照) and certificate of registration with the tax authorities (税务登记证). The former is quite a useful document, by the way; it states not only what tax system the company uses, but also the size of its charter capital, legal address, owner, and sphere of work – everything you need to know about a company before you decide to work with it;

• have an export license (对外贸易经营者备案登记表) and be registered with the customs authorities (海关登记证);

• have foreign currency revenue from a non-Chinese jurisdiction (offshore companies would be applicable in this case). Foreign currency earnings from abroad prove that it is an export transaction;

• have an invoice(s) with VAT (增值税发票) confirming the purchase of the goods on Chinese territory (the VAT refund is based on the Chinese price in yuan, not on the dollar export price), that is, have confirmation of input VAT. It’s important to ensure the authenticity of the invoice;

• have a customs declaration (报关单) confirming that the goods went through customs and were sold abroad. It’s very important that all the information about the goods (name, label, brand, units of measurement: pieces, sets) in the customs declaration matches the information on the Chinese invoice. If it doesn’t, the tax authorities will refuse to refund the VAT.

After the goods are exported, a packet of documents is collected for the VAT refund (the main documents being the invoice and customs declaration) and submitted to the tax authority. Depending on the class of exporter (class 1, class 2, or class 3), the tax authority will carry out the corresponding verification of the invoice’s authenticity (a request will be sent to the tax authority of the producer that issued the invoice, and the delivery of goods will be verified), reconciliation of data with customs, verification through the foreign currency regulatory body of the receipt of foreign currency revenue, etc. The decision on the VAT refund will be made based on the results of this process.

How long does it take to get a VAT refund? If we don’t take into account exporters in the first category, (who are usually large state companies with huge VAT sums to be reimbursed and who are able to go through the “green channel,” getting refunds in about one month), the usual time period for export VAT refunds is 3-6 months from the moment of export. It can take longer if the company is being inspected or the authorities have uncovered improper business practices.

Our company belongs to the second category of exporters, which means that we can submit VAT refund documentation the month following that in which the invoice is received. It’s important at this point to monitor the factory, so they don’t delay in providing documents for the goods. At the same time, it’s better to first wait for the export customs declaration to be prepared, and then ask the factory to prepare the invoice so that it corresponds to the declaration. We receive the VAT refund the month after the documentation is submitted, which amounts to three months in total from the moment of shipment.

Of course, everything described above is just the general procedure for receiving export VAT refunds. In practice, there are a great deal of nuances and subtleties involved. It’s important to have a good Chinese accountant who has a good relationship with the tax authority, to submit correctly completed documents to the customs authority, and monitor the situation at customs through a broker.

In short, you need a team of professionals, and to do everything in a legal fashion. After all, the refund of VAT from the budget is taking money away from the government, and no government likes to be tricked out of money. The Chinese government hands out severe punishments for fraud; happily, they don’t bring out the firing squad for economic crimes anymore, but the prison sentences for illegal VAT refunds are significant. Our company works in strict adherence to Chinese laws.

Export pricing in relation to Chinese VAT refunds

So how does pricing of goods exported from China work in relation to VAT refunds? To understand this, we should first divide producers and exporters into the following general groups:

Group 1. Large and medium-sized industrial enterprises that have the ability to either export independently or through subsidiary export companies. As a rule, but not always, these companies can immediately fully or partially deduct the export VAT when forming their FOB (or other Incoterms 2010 conditions) dollar prices. That is, they understand ahead of time that they will receive a VAT refund from the government, so when setting a price for their clients, they immediately make the corresponding discount of the total or partial VAT sum. This means that they offer goods for sale on the domestic market at a price that includes VAT, and on the international market at a price minus VAT, or minus part of VAT. It would seem that companies in this category aer already fully or partially refunding the Chinese VAT to the importer, but it’s important to keep in mind that such companies have high margins, and so their prices in general may be significantly higher than their competitors in the industry, who live more modestly, and don’t bankroll soccer or basketball teams. These companies are easy to find, as they actively advertise their services (which, again, has an impact on their prices), but their prices are usually going to be higher than the market average.

In any case, checking the competitiveness of their prices is simple: compare the FOB dollar price against the yuan price with VAT. When you know the VAT refund, it’s easy to determine which price is more competitive.

Group 2. Medium-sized and smaller industrial enterprises that also have export rights, but also actively work with Chinese export companies, which bring them clients. The FOB prices of these enterprises will usually be the same as their yuan with VAT prices, or even higher. This happens because they export little, and see the export VAT as an additional bonus from the Chinese government, and not as a main source of revenue. They prefer to work with friendly export companies that keep the VAT refund for their own use. 

If you are working with these suppliers, then China Money can provide just the services you need to get additional financial benefits.

Group 3. Medium and smaller producers that do not have export rights. They can only sell goods on the domestic market and only with VAT (if they work under the general taxation system). They do not have the ability to offer export prices under Incoterms conditions. These enterprises do little advertising, do not frequent international exhibitions, often don’t even have an Internet site, and are located far away from “civilization.” As a rule, they have very attractive prices, and of course, offer Chinese VAT “as a gift” at export. You really have to make an effort to find such factories, but this effort is compensated by the excellent prices and increased security for your business (competitors will have a hard time finding your factory). If you work with this category of supplier, or plan to, China Money can resolve your issues during the export process, and get you an export VAT refund at the same time.

Group 4. Export companies who are not producers. These companies provide export services and take the full Chinese VAT refund for themselves. China Money is a breakthrough in the export field; we not only provide Chinese VAT refunds, but fairly split them with importers. 

Now we have come to the most important part – how China Money functions:

Step 1. You send us an application (go to the application) in which you identify your supplier (we will check whether your supplier can provide an invoice with VAT), the products you want to buy, preferably with a description and photo (we will check whether this product is eligible for VAT refunds, and find out the VAT refund rate), and, of course, the price in yuan with VAT.

Step 2. After we have verified all the information you provided, we will calculate the amount of VAT you can get back when exporting your goods from China. The refund is calculated with the following formula:

VAT refund amount = Price of goods in yuan with VAT/1.17*VAT refund rate (0.17, 0.15, 0.13, 0.09, 0.05) For example, the goods cost 100 yuan with VAT, and the refund rate is 17%. 100/1.17*0.17 = 14.5299. So you can get a refund of 14.5299 yuan from the state budget.

Step 3. Depending on the price of the deal and the VAT refund rate, we determine the proportion by which the Chinese VAT will be redistributed between the exporter and importer. Please see the table of coefficients below:

The cost of our services from the VAT refund amount:

The remainder of the Chinese VAT will go to you as an importer. As you can see from the table, the larger the price of the shipment you are purchasing from China and the higher the VAT refund rate, the greater the amount of VAT you will receive.

Step 4. We agree on a cooperation procedure (the manner in which you will receive your part of the VAT). Manner of receipt (work scheme):

1) You immediately, on the basis of our contract, transfer a sum less your VAT portion. That is, you receive your VAT immediately in the form of a discount in the contract. You won’t have to wait several months for us to get a refund from the government.

2) In another possible procedure, after we receive the full sum from you under the contract, we transfer your VAT portion to the bank account you have provided us. We can also pay you through your personal card or even via Western Union. Again, this payment takes place immediately after we receive your payment, and not after we get the VAT refund from the government.

You choose how you want to receive your VAT portion.

Step 5. An international contract is signed between our company and your company (we can work on the basis of a letter of credit), as well as a contract between our Chinese company and your supplier (this contract clearly reflects all your requirements for the goods to be supplied, including quality standards, timing, etc.).

Step 6. After all the documents are signed and necessary payments made (including the payment of the letter of credit, if we are working on the basis of a letter credit), you will receive your VAT portion, we will send the goods through customs in China and execute the shipment of goods under FOB, CIF or other Incoterms 2010 conditions in accordance with our contract, and provide you with a packet of documents for customs clearance of the shipment in the destination country.

Please note the following important additions and comments:

-As described above, China Money does not provide services related to finding suppliers, additional negotiations with suppliers, business correspondence, discussions on current issues related to your cooperation with producers, and other questions. This project was created for the purpose of refunding a portion of VAT to importers of Chinese goods and equipment. If you need additional related services in support of the transaction as a whole, we can perform those services for additional payment. The terms of work and price of services in these situations is determined on an individual basis and directly depends on the volume of work. Basically, China Money does not perform additional work or negotiations with suppliers, but rather signs contracts with them under already agreed upon terms, carries out the export process, and gets you your Chinese VAT refund.

-Additional expenses arise during the export process, such as transport of goods to the departure port (it is possible to request that the factory provides a price including transport to port costs), port expenses, and costs for customs clearance and inspection (if they are incurred). We calculate all of these expenses ahead of time, and they will be deducted from your Chinese VAT portion, supported through appropriate documentation, and deducted only as they are actually incurred.

-Our company is not responsible for the quality of goods supplied or for any other action/inaction of the supplier arising from your agreements with them, since you choose the producer, and we conclude a purchase agreement with them at your request. You provide all the requirements for the contract with the producer as to the quality of goods, time period for delivery, etc., and we compose the contract exactly according to your stated requirements. We do not add our own requirements about the quality of goods to the purchase agreement. Remember, if the supplier does not fulfill requirements that you have not stated in the contract, you will have no grounds to take action against them. In this capacity, our company performs the purely technical functions of an exporter. That being said, as an additional service, we can provide legal support for your transaction, and represent your interests in a Chinese court if necessary.

-The prices in the international contract (between your company and our Chinese company) can be set immediately in yuan; today, payment under an international contract can be made in yuan or any other currency. However, risks associated with exchange rates arise when working with other currencies, and our company must convert foreign currency to yuan to pay the supplier in yuan.

We will also provide documents confirming the amount in yuan that we received from you after converting your payment (bank statements). If the actual amount in yuan you provide, after the foreign currency payment is converted, is greater than the amount needed to pay the producer, we will return the difference to you along with your VAT portion. If, on the other hand, the actual amount after conversion is less than the sum paid by us to the factory under the internal Chinese contract, we will subtract the corresponding amount from your VAT portion in compensation. 

-We will provide you with your VAT portion via the previously agreed payment method, and in any currency you wish, at the current market rate, of course.

FILL OUT YOUR APPLICATION FOR A CHINESE VAT REFUND

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