Prior to any purchase from China, one would be well advised to become familiarized with some key facts about how the country taxes Chinese manufacturers of goods to be exported overseas. Many may not be aware that the Chinese tax system presents some peculiarities as compared to other countries. Likewise, when you buy direct from China, you should also consider how your home country imposes duties on goods imported from the country. As Mike Bellamy, advisory board member of the China Sourcing Information Center puts it:
Too many new-to-China buyers focus only on product price and then get an ugly surprise when they learn there are applicable taxes which they didn’t plan for in the budget. Another mistake is to ask the supplier in China to confirm the taxes and duties in the destination market. Suppliers may not be knowledgeable about how your government would classify the given product and what taxes apply.
Taxes On Goods For Export
It is important to be aware of 2 separate facets of the Chinese taxing system related to the export of goods. China's Value Added Tax System (or VAT), in place since 1984, is structured with 3 different tiers that decide the general VAT rates of a given manufactured item. As a starting point, this rate is set at 17% for most goods and services. The second feature is the export rebate system enjoyed by many Chinese manufacturers of products intended to be sold overseas. At one extreme, some Chinese suppliers can receive a full government rebate for the VAT paid, equivalent to a subsidy by the government of 17% on the product value. Others might enjoy lesser rebates and rebate values including 11% and 3% or even no rebate at all depending on the industry and the government’s current priorities. The government sets and gradually adjusts these rates depending on a variety of factors such as: favoring the development of key industries helping to boost the exports in that industry, implementing tailored environmental policies, or even responding to growing international concerns about the country’s trade surplus.
To learn more about these systems and how they works, read our White Paper on China's VAT and Export Tax Rebates.
In order to avoid mistakes when buying from China, importers of Chinese goods should also have a clear mind of the type of product that they are purchasing. Most overseas countries impose import duties on goods that are categorized according to the specific Harmonized System Code, or HS Code, which associates an imported product category with a specific import duty. Knowing the right code of your product is of central importance to your order as being without it may not only delay customs clearance but could also incur unexpected costs. Prior to any purchase, a good strategy would then be to check the right code of your product and the duty to be paid with your procurement specialist who should be familiar with the type of product you want to import and your home country’s customs regulations. Alternatively, you can look through various HS Code databases procured by your national government.
How To Calculate The Total Cost Of Your Order
The following examples are intended to help you understand the price components related to your purchase from China. Where not indicated, prices and costs include liable VAT rates from both China and the importer’s country. These examples abstract from the peculiarities of the Chinese tax rebate system.
The fictive product is produced in Beijing and is to be delivered at your factory a few hundred miles north of the Port of Los Angeles.
The fictive product is produced in Beijing and is to be delivered at the importer’s location in Anvers, Belgium.
*The sourcing agent’s fee is a one-off variable fee and is composed of costs related to for e.g. the process of selecting qualified Chinese manufacturers, inspections and quality controls. The fee quoted here is purely hypothetical and will be variable depending on the order and the specific agent.
**Transportation costs are based on the current shipping rates used by the shipping service provider. In the examples above, all prices, costs and rates are fictitious, although the ratio between the different costs and the price EXW are fairly realistic.
Source: Aussenhandel, Klaus Olfert (Publisher: Kiehl).
As these examples above show, the final gross price that the importer would end up paying could easily range from 40% to 60% of the quoted price in China. The use of an agent in some form should mitigate the risk that deliveries do not live up to the general terms agreed to between the Chinese supplier and the importer.
These examples are meant to present, in a simplified way, the different costs and fees that are likely to be associated with buying from China. The businessman with an innovative idea and a viable business plan looking to buy from China should nonetheless keep the above mentioned precautions in mind when evaluating the cost effectiveness of importing from abroad.
Do you have any experience with complications involving VAT, the tax rebates system, or your destination port's customs regulations? How do you deal with these future costs when choosing suppliers?
- Samir Benjelloun- CPG Marketing Intern