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With multiple contracts, how is the VAT and VAT rebate processed among multiple parties?

Our turnover is about 10M USD per year. But we have quality issues concerning PVC production and we must control it very close in China. So we plan to sign an agreement with film production factory, and they will sell to “finishing” factory to make the printing and packing. So we will have multiple contracts with multiple factories.  In this selling transaction there is VAT paid but it is very confusion how the VAT and VAT rebate is processed among the multiple parties. Any thoughts on our strategy?

ANSWER:

In my experience, unless you have your own legally registered entity in China, it is very hard to arrange the “step by step” processing under multiple contracts in China. It may work even if you don’t have your own office only if you have a 3rd party who is licensed to do domestic and international trade, but you really need to trust that 3rd party because  the parties involved may collude with each other, but not let you know, and be tricky about the VAT and VAT rebate.

As your orders are large, I have a few suggestions.

  1. Consider setting up your own office in China.  You can keep costs down by outsourcing the accounting and VAT processing to a 3rd party. But legally you would have an entity 100% under your control which you could buy and sell raw materials between Chinese companies and export under your own name to get the VAT.  This option gives you the most transparency and control.  If you would like to learn more, I would be happy to put you in touch with the company that has helped me in this area.
  2. Another option that gives you transparency would be to outsource your buy-sell and VAT processing to a trusted 3rd party.  Such companies may charge a monthly retainer of a few 1000 USD to manage the vendors + a % of PO value to process the VAT for you.
  3. In my opinion, and what I have done in similar instance is to make the raw material supplier the official spec that your processor needs to use. For example, I help a 1st tier supplier of many of the major names in the PC industry buy millions of USD of goods each month. We work with the client to find the BOM (bill of material) and negotiate the prices. Then force the processor (the company that converts the BOM into a finished product ready for export) to buy from the authorized BOM sub supplier at the pre-agreed price and sell to client FOB China port at agreed price. The key step is that a 3rd party (my team) is at the BOM supplier daily to watch the quality. So we aren’t buying the BOM and sending to processor, but we do have the power to stop production and tell processor not to pay BOM supplier if the quality has problems.

Wishing your successful China sourcing!

 

Best Regards,

Mike Bellamy

Chairman of the Advisory Board, China Sourcing Information Center

China Operations Director, PassageMaker Sourcing Solutions

Author, “The Essential Reference Guide to China Sourcing

Blogger, www.ChinaSourcingInfo.org

LinkedIn Profile: http://www.linkedin.com/pub/michael-bellamy-author-business-owner-volunteer-advisor/8/52a/389

 

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