Export Rebate: The Secret to the Cheaper Made-in-China Product Selling Outside China

It’s widely known that made-in-China products are selling at a cheaper price outside China, not only the OEM articles like Nike, but the China based Lenovo also follow that pricing. There are many reasons contributing to the different price, including pricing strategy, logistic cost, office rent, taxation and even the change or exchange rate. IN this essay, we prefer to discuss the cause of a cheaper price of the same article overseas from the aspect of tax rebate.

I. VAT rebated in export

To take the Nike shoes as the instance, when Nike plants export the shoes, China taxation authority will rebate the paid VAT occurred during the process of production and circulation before the export, and that’s called the “export tax rebate”. So, let’s first take a look at how many taxes shall be paid within Nike shoes’ manufacture and circulation before the export.

Plant A of Nike purchases an installment of raw material from Company B in China. The price exclusive of tax of the material is RMB 100, and the applicable VAT rate is 17%. Then after the VAT voice issued by Company B, Plant A shall pay RMB 117 (100+100×17%), and thereby Plant A acquires input VAT RMB 17. After the material is made into sports shoes and sold by Plant A to Company C at a tax exclusive price of RMB 150, considering the VAT rate of 17%, Plant A shall issue the VAT voice and collect the payment from Company C totaled RMB 175.5 (150+150×17%), whereby it occurs output VAT of RMB 25.5 to Company A. Supposing Company A has no other input taxes, the VAT payable by Company A at that time is RMB 8.5. (the illustration as follows:)

If Company C plans to export the shoes to other countries, at that time the VAT paid has been totaled RMB 25.5, including RMB 17 from Company B and RMB 8.5 from Company A. Then how to rebate such taxes to the exporting company? In fact, China laws hold a different rebate policy to the trading export company and the manufacturing export company, and the details will be discussed below.

II. The tax free and rebate policy for trading companies

Still take the case of Nike as the example. When Company C purchases the products from Company A at RMB 175.5 and thereafter exports them to Company D in Japan at RMB 180 (FOB), also to suppose the rebate tax rate is 17%, Company C could enjoy the following rebate policies: 1) Tax free for the price difference in the transaction between Company C and Company D, namely the VAT occurred for RMB 30 (180-150); 2) After the departure of the hoes and the payment by Company D, Company C may apply for the refund of RMB 25.5 (150×17%) with the customs declaration, export invoice, Export of foreign exchange check-offs list and other documents.

Here, we would like to point out that not all the articles will be refunded for their taxes paid within the processes before the export. Chinese taxation authority has regulated different tax refund rate for various commodities, and thereby we could see the 5 rates of 17%, 13%, 11%, 8%, 5%. That means once the rate of 13% were applied in the case above, the rebated amount would be only RMB 19.5 (RMB 150×13%) rather than RMB 25.5.

III. The tax policy of exemption, deduction and rebate of manufacturing companies

In the Nike shoe case above, if Company D places the order directly to Plant A instead of purchasing from Company C, Company D shall thereafter pay RMB 160 (FOB) rather than RMB 180. In the event that the rebate rate remains 13% and Plant A sells the shoes in the mean time in China which arouses VAT of RMB 10, then Plant A may enjoy the following policies: 1) tax-exemption: the sale of the shoes to Company D from Plant A will be tax-free, namely Plant A shall not pay the VAT of the added value of RMB 60 (160-100); 2) tax deduction: the payable VAT by Plant A from the domestic sales could be deducted; 3) tax rebate: after the legal deduction, Plant A may also ask for the refunding of the remnant tax to the taxation authority.

Plant A will only be refunded RMB 0.6, and that seems to be not cost-efficient comparing with the trading companies? I shall say the answer is NO. When the commodities are exported after they are sold by Plant A to Company C, Plant A shall pay the VAT for this process, and moreover since the taxation authority permits Company to deduct the payable tax from domestic sales with the refundable tax, Company may follow that instruction which is benefited to the fund allocation of Company A.

IV. The main reason of 17% transfer tax

In the real transactions, the manufacturing companies may place their order of raw material either in China or to the selling parties in other countries; for the processing, there may also produce the power rate, water rate and transportation expenses; the raw materials purchased from foreign counties may be conducted normal trading method, or with processing trade; all these aforesaid situations may all influence the application of the tax rebate policy, and the refunded amount calculation.

However, to conclude from the above cases, when Nike shoes are selling in China, the transaction price will necessarily include the VAT of 17%; when shoes are exported to other countries, the VAT paid in China will be refunded or partly refunded at least, and on the other hand, the turnover taxes are mostly less in other countries, e.g., the consumption tax (equivalent to VAT in China) is 5%, far less than 17% in China. And that’s the reason why Chinese products are selling at a cheaper price outside the China.

This post is quoted from DeBund Newsletter of August.

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