VAT rebate reduction update

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As many of Dezan Shira & Associates clients and China Briefing Blog readers will know, the Chinese government has reduced the amount of VAT rebates applicable upon export of some 2,831 different types of products in a circular that takes effect from this Sunday, July 1, 2007.

This was anticipated in the May issue of China Briefing, in which we outlined the governments desire to increase pressure on businesses that were energy inefficient, polluting, or involved in processing trade. The first two items are designed to move Chinese manufacturing further up the value chain and to cut back on wasteful and unnecessarily expensive processes, while the third is in response to cut back primarily on the US-China trade deficit and to slow the appreciation of the RMB against the U.S. dollar.

These measures affect both Chinese domestic and foreign invested enterprises in China, with the changes to VAT refund rates affecting the prices charged on exported goods in addition to the profit margins for exporters.

The implications of these changes vary depending upon the product category. For readers requiring clarification on their particular product, please contact Dezan Shira & Associates with details of the product and the HS chapter number, and we will be pleased to provide details of any changes affecting your particular product.

In effect, for exporters with products affected by these changes, for Chinese VAT purposes, the exported shipment will be classified as a ‘domestic’ sale upon which VAT would be payable. Alternatively, an exporters FOB export price will be deemed to be inclusive of the applicable charge. This means that input VAT costs incurred by the exporter would be creditable against the deemed VAT output charge.

This is already filtering down the supply chain and will affect nearly all companies involved in Chinese exports in one way or another. We are already being made aware of Chinese manufacturers, many of whom have long existed on thin profit margins, being squeezed by this and effectively passing on the costs of export back to the buyer in terms of price increases. We have also been made aware of different Chinese customs locations being inconsistent with the treatment of products and the amount of VAT reduction, with differing treatments being given between the same product between different ports. Again, this may reflect a massaging of the true manufacturing cost as well as be indicative of consistency problems within the Chinese customs administration, a fact acknowledged by Vice Minister Sun Songpu in our annual meetings with him (page 5, China Briefing, May 2007).     

Accordingly, international buyers need to be aware of carefully built in additional profit margins being placed within such increases beyond the scope of the actual VAT refund reduction, as well as local Chinese customs treatment inconsistencies. This may well require a quick element of “pricing due diligence” to be carried out to explain and understand the true impact on VAT rebate reduction affecting the Chinese manufacturers true additional costs in order to preserve true purchasing price integrity without any attempts to build in hidden price increases.

Clients or readers requiring assistance with understanding the new China VAT rebate reductions may contact Dezan Shira & Associates: click here.

Dezan Shira & Associates: Beijing, Tianjin, Dalian, Shanghai, Hangzhou, Ningbo, Guangzhou, Shenzhen, Zhongshan, Hong Kong