Export Tax, VAT Rebates & Tax Exemption in China
By LULL ZHANG
Export tax rebate/exemption is a major concern for most foreign enterprises in China. The reason for this is that firms understand the policies and declaration procedures regarding this issue will affect their cash flow. In practice, this area is extremely complex, often resulting in different tax advisers on exporting modes and tax rebate declaration processes, leading to differing tax rebate amounts, and consequently affecting the profitability of operations.
Export Tax Rebate Policies
By export tax rebate, it means that the Chinese Government promises to rebate the tax after the export products are exported. Such taxes should be incurred during the process of domestic production and distribution. The purpose is to encourage exportation.
Generally speaking, these taxes include VAT (value-added tax), business tax and special consumption tax. However, for foreign-invested companies, such rebate only refers to VAT rebates due to the Chinese Government’s current stipulation of zero rate of consumption tax for these companies. Therefore, export tax rebated on VAT is a major concern for most foreign-invested companies.
In order to appropriately use Chinese export tax rebate polices to claim back the most tax, it is necessary to understand the relevant VAT policies first.
(1) Who should pay VAT?
The Chinese Government stipulates that all units and individuals engaged in the sales of goods, provision of processing, repairs and replacement services, and importation of goods within the territory of the People’s Republic of China shall pay VAT.
(2) VAT rate
The VAT rate generally is 17 percent, and at 13 percent for some goods. For small taxpayers it is 6 percent. It should be pointed out that exporting goods is tax-free.
For taxpayers dealing in goods or providing taxable services with different tax rates, the sales amounts for goods or taxable services with different tax rates shall be accounted for separately. If the sales amounts have not been accounted for separately, the higher tax rate shall apply.
(3) Calculation for VAT
The VAT tax payable shall be the balance of output tax for the period after deducting the input tax for the period.
The output tax refers to the VAT amount that is calculated with sales turnover and VAT rate and is collected by taxpayers from buyers of commodities or services when taxpayers sell commodities or provide taxable services.
The input tax refers to the VAT amount paid or incurred by the taxpayer for purchasing commodities or receiving taxable services
If the output tax for the period is less than, and insufficient to offset the input tax for the period, the excess input tax can be carried forward for setoff in the following period.
(4) Additional provisions for VAT
The following items shall be exempt from VAT:
• Self-produced agricultural products sold by agricultural producers;
• Contraceptive medicines and devices;
• Antique books;
• Importation of materials and equipment directly used in scientific research, experiment and education;
• Importation of materials and equipment from foreign governments and international organizations as assistance, free of charge;
• Equipment and machinery required to be imported under contract processing, contract assembly and compensation trade;
• Articles imported directly by organizations for the disabled for special use by the disabled; and
• Sale of goods, which have been used by the sellers.
For taxpayers engaged in tax exempted or tax reduced items, the sales amounts for tax exempt or tax-reduced items shall be accounted for separately. If the sales amounts have not been separately accounted for, no exemption or reduction is allowed.
(5) When does VAT liability arise?
For sales of goods or taxable services, it is the date on which the sales sum is received or the documented evidence of right to collect the sales sum is obtained.
For importation of goods, it is the date of import declaration.
The customs office on behalf of the tax authorities shall collect VAT on the import action of goods. VAT on self-used articles brought or mailed into China by individuals shall be levied together with customs duty.
In Issue No.15 we will continue with Part 2 of this article