Same as for the EU, in China apart of the selling of products, the import of products is also subject to VAT. In opposite to the normal VAT this so called Importation VAT is an excise tax which is subject to the custom tax law. Therefor it is gathered by the Chinese customs bureau and can apply to a person as well as to a company.

Value – Added – Tax

Importation VAT

The Importation VAT is based on the custom value. However in order to get the basis of assessment, you have to add some further surcharges to that custom value for example the delivery from the EU-border to the first destination in the country. In case the company continues processing, the already paid importation VAT can be deducted from the then added value and thus risen output VAT.

In the EU, the general tax rate for imports is the same like the VAT in the corresponding EU member countries. For example in Germany the VAT is 19 % of the basis of assessment. For some special products it can be reduced to 7 %. Furthermore all products which are exempted in the member country are exempted from the importation VAT as well, since these products shall not be charged more than the equivalent products in the inland. In China the tax rates are slightly different as the table below shows:

In China besides promoting its own industry, the Chinese government also recognizes the importance of imports. The contributions from abroad, especially by European companies through cooperation in research and trades are very valuable to the Chinese economy. Thus over the past decades, especially companies in the automotive and engineering industry have set up their presence in China. In the following we would like to illustrate three common VAT issues faced by foreign companies in China on the example of the automotive industry.

Foreign Automotive Trade with China: Three Common VAT Issues

Valuation of Products for Import VAT

When very technical products for example auto parts are shipped to China, they pass through Customs Control where all relevant documents are inspected. China Customs pays close attention to the valuation of the products in order to ensure the proper payment of Importation VAT. Currently the Importation VAT rate is 17% which has to be paid by the importer in China. When China Customs figures out a discrepancy between the given valuation and its own estimates, it may raise a price query. The importer is then required to provide evidence that the given valuation approximates the price of a similar product which was previously sold to a third party and was accepted by China Customs beforehand. If the importer can´t show any evidence to the China Customs, the authority will set its own valuation which would most likely result in a higher importation VAT burden. ECOVIS Beijing therefor advises automotive importers to prepare a comprehensive explanation and carry out a circumstances-of-sales test to prove that the price was set on an arm’s length basis within pricing norms common to the automotive industry.

Harmonised System Code for VAT Refund Rate

During the inspection process, China Customs also pays close attention to the Harmonised System (HS) Code given to the auto parts. This code determines the exact VAT refund rate. Input VAT paid when sourcing product parts from abroad of China can be refunded when the importer in China later also exports the final products abroad. Usually the VAT refund rate lies at around 13 percent but it may vary according to the material of the item in question (composition of rubber, type of plastic and metal) as well as the physical state of the item (how it is assembled). China Customs may dispute the correct choice of the HS Code provided by the exporter in China. If the stated HS code of the exporter would have led to an over-refund of VAT, the exporter in China would be fined. Due to the complexity of  many technical product parts in terms of material and physical state, ECOVIS Beijing recommends that exporters carry out a detailed study of relevant coding issues through technical and customs specialists. This may cost time and resources but will prevent the export of auto parts from incurring costly fines.

VAT Refund when Manufacturing in China and Exporting Abroad

Compensation for Development of Products

Especially when supplying Chinese automotive brands in the green mobility sector, suppliers are often confronted with additional costs for developing technologies and moulds. In order to cover these additional costs, the supplier may require the automotive company in China to transfer a compensation in advance. However, the current foreign exchange regime makes it difficult for the importing company to legally transfer the compensation as no physical import of product parts actually takes place.  The product part supplier therefore often reverts to raising the unit price of the product in order to obtain compensation. However, this practice does not generate the necessary compensation up front and simply applies the export VAT rate of 17 percent to a larger base value. ECOVIS Beijing therefore advises product exporters from China to sign an additional contract for the development of technologies and moulds. This practice ensures the payment of the development services up front which are subject to a lower VAT rate of just 6 percent and a surcharge of 12% on VAT.

Also read our article VAT in China part 1 of our VAT article series and get to know the basis of the VAT system in China. In our final VAT in China part 3 article you can read about the differences between Business Tax and Value Added Tax as well as how a European headquarter can transfer money to its Chinese branch.

If you have any further questions about VAT in China contact our Partner Richard Hoffmann via email: richard.hoffmann@ecovis.com