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Does VAT apply to tooling for customer owned tools, purchased from a supplier in China?

Could you please confirm if VAT applies to tooling and tooling modifications for customer owned tools that are purchased from & located at a supplier in China? These tools are used to manufacture plastic components that are shipped to our facility in the USA and used for further production purposes.

ANSWER:

Let’s assume you are dealing with a tool and die shop or a factory that “opens the molds” in house rather than outsourcing to another company.
According to China tax law, the seller should be paying VAT to their sub suppliers (tool house buys raw metal for die for example, then adds labor to finish the die and sells to you as the buyer) and the taxes paid are built into price at which the tool and die maker sells you the tooling.

So in this case there should not be some kind of invoice for “Tooling Cost + X % VAT” for the tooling and/or tooling modifications.

However, if your supplier is outsourcing the tooling to 3rd party and passing on the bill to you, then VAT
does apply and the supplier may even present you with a bill for “tooling cost + X % VAT = total amount due.”

The VAT system is long on loop holes and short on transparency.

More often than not, the suppliers are using confusion over VAT as a smoke screen to inflate costs.

Here are just a few examples.

1. Supplier charges you a “cost plus VAT” but never pays the VAT to the taxman and keeps it in supplier’s pocket. Ask your supplier if they can provide official receipts (“fapiao”) if they ask you to pay the VAT. And get ready for some slick moves as they dance all around and never really explain why they can’t give you a fapiao.

Unfortunately, as items 2 and 3 below explain, even if you get the receipts, it doesn’t mean you have transparency into pricing and taxes.

2. Supplier says “I don’t make any profit on the tooling, I pass on all costs to you with no mark up.” Sounds fair enough, UNLESS you understand that the supplier may be taking the “VAT tax paid receipts” and submitting them to the local government to get a rebate or tax refund at a later date.

Kind of like when the car dealer sells you “at cost” but there are a bunch of hidden kickbacks from the factory to the car dealer that are not laid out on the table.

3. It is not uncommon for collusion to take place been the supplier and sub suppliers. Your seller says that he paid X RMB to sub supplier for raw materials and simply asks that you cover his costs and is willing to show receipts. Sounds fair enough, UNLESS you understand that what is written on the receipt from the sub-supplier is not always what the supplier actual paid to the sub.

For example, if the true cost for the tooling from the sub supplier to your supplier was 100. The sub and supplier would both
make money if the supplier told the sub to write up an invoice for 300, 1000 or 10,000 but payment to sub supplier would be for only 120 to cover taxes on the big number + the 100 + a “little something for the effort.”

Everybody wins except the buyer. Even the taxman gets paid. Yes, official receipts with taxes paid can be purchased independent.

 

Bottom line

Chinese factories often run three sets of books. One for the boss (what is the real profit), one for the tax man (keep tax exposure low) and one set for operations team (what needs to be made by when). So suppliers have become very creative accountants and as foreign buyers we would be naive to think that with a bit of understand about how the tax system works, we can out
maneuver our suppliers and benefit by what appears to be a win-win situation. (“Win Win is a panda in Sichuan” I like to say.)
Factory bosses run circles around the Chinese taxman, confusing a foreign buyer with some VAT smoke and mirrors is like taking candy from a baby.

The only way to win this game is to not play the game.

 

While we can’t out negotiate our suppliers, we can certainly out research them. Even when I am buying tooling, I get a bunch of reference quotes and use this to negotiate what is a fair “all in final price” for a given set of tools.

 

Sorry for the long answer, but it takes a bit of explanation to open the bamboo curtain for you. If you need support with research to find the going price of a set of tools in China and/or have somebody take a closer look at your VAT planning, just let me know, I would be happy to introduce my colleagues over at PassageMaker who specialize in these areas.

BTW, since you own tooling in China, check out the “tool and die steward” (http://www.psschina.com/services-and-pricing/tool-and-die-steward/)  if you have not done so already. Could save you a bunch of money and headaches down the road.

Thanks again for your questions!

Wishing you successful China sourcing!

Question answered by Mike Bellamy, host of “Ask the Experts” at the China Sourcing Information Center.

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). He is also the author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)




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