VAT Refund for Export Business in China
In the Chinese value added tax (VAT) regime, it is generally not planned that the tax authorities refund any input VAT credit to tax payers, if the balance of input VAT exceeds the output VAT in a fiscal period.
Exceptions to this rule are made, if the input VAT credit is related to the cost of exported goods. In this case, the tax payer can apply for the so-called VAT refund. It refers to the refund of input VAT and consumption tax paid by the exporting entity in the course of purchasing or manufacturing the exported goods.
This political tool to boost the China economy also promotes foreign invested operations in China. It is a potential benefit for a Trading WFOE/JV or Manufacturing Company. The VAT refund can improve the cash flow of an exporting enterprise by realizing VAT credits. The purpose is to enhance competitiveness of Chinese exporting enterprises when entering the international market.
In order to qualify for the VAT refund, exporters must initially register with the tax authorities, providing their business license and export approval documentation to the competent authorities and providing evidence that they have implemented a robust accounting system, which allows to track the portion of their cost related the exported goods. Usually, the tax authority will also conduct an onsite inspection of the applying enterprise. Once the registration is completed, applications for VAT refund can be submitted at any time, but no later than 1 year from the date of the export customs declaration of the respective shipments. The applicant must provide evidence for the production and procurement cost. Since this can be quite complex for manufacturing enterprises, many companies – foreign and domestic invested–establish a separate trading company for the export, which can purchase the export goods from the affiliated production company as well as other third-party manufacturers. For combined trading/manufacturing enterprises there are limitations to receive the export VAT refund: e. g. refund may only be possible for traded goods which are similar to the self-manufactured goods. We recommend to carefully review the business model and inquire with the local authorities in advance.
We emphasize that the VAT refund is not an additional revenue but only the realisation of an existing input VAT credit. While the domestic VAT rate for the sale of goods is 16%, the percentage of the VAT refund can be lower and ranges from 0% to 16%, depending on the HS code of the exported goods, as declared to customs authorities upon export. This means that in many cases, only part of the input VAT can be refunded. After completion of the refund procedure, the non-refundable portion can no longer be set off against domestic output VAT but must recognised as additional cost of goods. The declaration of the specific HS codes for the exported goods should be handled with care to ensure that the HS code matches the actual specifications of the goods. If there are different matching options, the enterprise should ensure that the most beneficial option in terms of VAT refund is chosen.
If you have any questions regarding the input VAT and VAT refund procedures, please feel free to contact us.