Tax refund on exports from China

Foreign buyers often talk about the tax refund policy on products exported from China. Once again, here is a specificity of the Chinese economic system. This article will answer the following questions:

  • What is the policy about?
  • What is the key information to remember ?
  • How to calculate the F.O.B price?
  • I – What is the policy about?
    A: Background
    In 1994, China sets up a taxation system including value added tax (VAT) and consumption tax. In contrast to Europe, VAT is not considered as a neutral tax for manufacturers, intermediaries and all exporters in general.
  • B: Policy Goal
    Initially, the Chinese government and trade bodies have implemented this policy to encourage the exports of products “Made in China”. Today it has become a mainstay of the Chinese economy. Over the years, with the development of foreign trade, the policy has become a lever on the Chinese industry.
  • C: Application
    The taxes which can be refunded are commodity turnover taxes, mainly the VAT and consumption tax.It is only after the goods have left the Chinese port and that the export declaration is complete that the exporter may file a rebate application.
  • D: Limitations
    All exporting Chinese companies may not be able to get a refund. Indeed, Chinese exporters who do not have the status of “General Taxpayer” (average taxpayer), are not eligible for a tax refund.Moreover, this policy is only valid for exports, thus, it does not apply to domestic sales. It is only after that the exportation have occurred, and that the exporter can provide the payment of various taxes and all relevant supporting evidence that they can file a demand for refund. This therefore requires a very clear understanding of the requirements and especially patience. It is not an automatic and preset repayment.
  • E: Percentage of reimbursement
    The tax rebate percentage varies according to industries and products. This is a system that is denounced by the WTO because it discriminates Chinese companies belonging to specific industries. To be more specific, the percentage varies from 0% (in this case, the factory or Chinese trading company exporting the product will not be given any refund) to 17% (the full equivalent of Chinese VAT).Besides these rates fluctuate depending on the intervention of the Chinese state.The commodity turnover taxes is thus a real economic tool that influences the vitality and content of exports from China.For example, in late 2014, when facing with a slowdown in exports, China increased the reimbursement rate applicable to several industries, including textiles and some high value-added industries. Similarly, it decreased the rates applicable to certain “polluting” industries.
  • F: Tax Refund Procedure
    A: the Chinese exporter / Chinese trading company purchases or contracts a product, component, from a Chinese company and pays the VAT and product consumption tax;B: Exporter / Chinese trading company sells its product to a foreign customer;C: Delivery and loading of the goods aboard the vessel, and declaration of the goods at customs;E: Filing of a request for tax refund by the exporting company;F: Refund based on the specific rate applicable on the product;Estimated time between the filing of the request and collection of refund : about 2 months.


II – Facts to remember

  • 1) The refund is not automatic for each export.Some exporting companies in China are not eligible for tax refund.2) This is a refund, and not a deduction of taxes.This requires that the export be complete. The collection is usually around two months after filing the application.3) The rate of reimbursement varies.The percentage of refund varies depending on the products and government policies. The refundable portion is only a fraction of the taxes already paid.


III – How to calculate the FOB price in China?

  • Since export opens the doors to a refund, it is clear that exporters in China (eligible for reimbursement) take it into account when calculating the FOB price of their product.Composition of F.O.B prices
    Product Price (without taxes)
    + Product costs
    + VAT (% variable between 0 and 17)
    + Consumption tax
    + F.O.B fees (transport, declaration, other)
    % VAT refund * Product Price (without taxes)
    % Refund of consumption tax
    + Profit margin

This article was written and published by Shanghai JS Sourcing
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