As of 1st August, we (in Australia) are being charged 6% VAT for all export clearance formalities and freights prepaid in China. We pay the Chinese Freight Forwarder or the Shipping Line the VAT, and they in-turn would be paying the Chinese Taxation Office. We will also be paying tax in Australia (on the product, export formalities and transport), so in effect we are paying a tax on a tax. Would the Chinese Freight Forwarder or Shipping Line be getting a rebate for this VAT? I feel if they can get a rebate, they shouldn’t also be billing VAT to us. I know in Australia it is illegal to make profit on taxation, but I don’t know what the law in China is on this matter. I would really appreciate any insight you can offer.
When you say “we are being charged 6% VAT for all export clearance formalities and freights prepaid in China.” Do you mean that this is a line item that the China side is charging or do you mean it is an inbound VAT stipulated by Australian government? I’m assuming it is a China side issue and have the following comments:
What terms are you using? For example, if you are buying ExW Factory then yes, you or your appointed agent (shipping or sourcing agency) would be responsible for sorting out the documentation, VAT and VAT rebate. The problem is that many of these middlemen don’t have the proper licensing or experience and they either lack the ability to get the rebate back, or just as likely, they simply put the rebate into their pocket.
Everything is up for negotiation. Keep in mind that under FOB terms the seller is responsible for arranging the export and processing all taxes and rebates on the China side. So negotiate a good FOB price that you can live with, knowing that the VAT rebate amount will not be disclosed. Even if the seller claims to tell you the VAT rebate, there are a lot of smoke and mirrors. It is kind of like when a car dealer gives you a price below the MSRP. VAT like MSRP is easy to manipulate for the purposes of making a sale.
You can find an easy to understand explanation of your options in this blog post: What is VAT and why should I worry about it? But here are the highlights.
If your orders are small-medium, it probably makes sense to keep things simple and buy “FOB port” rather than “ExW China factory.”
If the order is large you may consider buying ExW China and appointing an agent with im-ex rights to process the VAT rebate and exportation on your behalf. (Here is an example of such an agent). Make sure the agent you hire is both experienced and transparent. There are too many sloppy brokers out there that will cause more harm than good. And many of them will try to re-route the VAT rebate into their pockets rather than yours. So be careful
If the orders are steady and very large, consider setting up your own entity in China to not only process the VAT rebate, but also support QC and vendor relations. Here is a good article on the steps/costs involved for that option: Advanced sourcing skills: WFOE’s and other options for a China presence
If you would like introductions to China based companies that can help you manage your supply chain in a more efficient fashion, please check out www.SourcingServiceCenter.com where I keep a list of endorsed service providers who have done a good job for me on similar cases.
Let me know how things work out for you.
Question answered by Mike Bellamy.
Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). Author of “The Essential Reference Guide to China Sourcing” and founder of PassageMaker Sourcing Solutions