Most importers buy their goods under FOB terms and don’t need to worry about the export procedures, which are handled by their suppliers. But, in some cases, the Chinese exporter tells a story to justify a delay, and the purchaser needs to understand the mechanisms at play in order to understand what really happened.
So here is what I understood about the VAT (Value Added Tax) system, and the rebate that applies to exported products.
The VAT rate that applies to manufacturing activities is 17% in China. And the Chinese government give a VAT rebate to exporters — by the way, this is not unique to China, and many other countries collect no VAT on sales to foreign companies.
China gives full rebate (the whole 17%) on export sales of a few product categories. For other categories, the rebate is lower, or even 0%. It depends on what industries China wants to encourage.
To collect this rebate, the exporters need to show that they have paid the VAT on the parts they purchased, and that they have exported the finished products. From what I gathered, they typically get the refund several months later.
Can all exporters prove that they have paid VAT on the parts, before exporting products? Of course not. A friend tells me of many Africans who buy products on the market in Guangzhou and ship them to their country — they have to work with a freight forwarder who will sell them a “maidan chukou”. This document is, from my understanding, an authorization to export without the usual formalities.
Similarly, the manufacturers of electronics in Shenzhen who buy parts illegally from Hong Kong (without paying any VAT) have to work with a freight forwarder to get their goods shipped out “under the radar”. The forwarders, who often have an I/E (Import & Export) company on the side, monetize the rights to get shipments out in this manner. They typically have an export license with a very wide product scope, so they can handle many product categories.
What are the implications for foreign buyers?
- In at least 95% of cases, the importer is better off buying under FOB terms, to avoid all these declarations.
- Smart buyers will note that it is safer to work with a Chinese company that has an export license, rather than having one company take care of production and another one handle paperwork. What happens if the “paperwork” company gets into trouble with the government at the wrong time? Do all these intermediaries respect the confidentiality of your data?
Did I get this right? I am not the foremost expert on this topic!