Companies planning to either sell or import goods to China should have a strong understanding China’s import tax environment before signing sales contracts.
Importing goods to China implicate three types of taxes – customs duties, value-added tax (VAT), and consumption tax (CT) – depending on the nature of the imported good and whether it falls under CT specified categories.
The amount of import tax liability and who is ultimately responsible for paying them generally depends on how the sales contract is concluded between buyer and seller.
Terminology of import taxes
The International Chamber of Commerce’s (ICC) International Commercial Terms are the most commonly used terminology for expressing pricing or risk related issues associated with goods transit. The most commonly used when signing a contract are:
- CIF (Cost, Insurance, and Freight) – meaning that the seller is responsible for the cost of freight and insurance to facilitate safe delivery of the goods to the port of destination; and,
- FOB (Free On Board) – meaning that the buyer is responsible for the above expenses.
The amount of import tax and customs duties payable are calculated based on the price or value of the imported goods, which is called Duty Paying Value (DPV), and is determined based on the transacted price of the goods. This includes transportation-related expenses and insurance premiums on the goods prior to unloading at the port of arrival in China.
Taxes, such as VAT or CT, are not included in the determination of the DPV. Another notable term is Composite Assessable Price (CAP), which is a combination of DPV, import duty, and CT if applicable.
The following formulae show how DPV and CAP are calculated:
DPV = Cost of goods + Transportation cost + Cargo insurance
Import duty = DPV x Tariff rate
CAP = DPV + Import duty = DPV x (1+tariff rate)
VAT = CAP x VAT rate
To illustrate, suppose a Chinese company is importing machinery from a European company, and has signed a contract according to FOB pricing. Therefore, all the shipping and insurance costs would be borne by the Chinese buyer.
This means that the European company’s primary responsibility is to load the machinery (goods) onto the ship arranged by the Chinese buyer, and clear the goods at customs ready for export. In this case, the following expenses need to be considered:
Cost of the machinery: US$1,000,000
- Freight: US$30,000
- Insurance premium: US$4,000
- Import tariff rate: 10%
- Import VAT rate for machinery: 17%
- Port handling: US$3,000
- VAT rate for port handling service: 6%
- Import duty and VAT:
- DPV = 1,000,000 + 30,000 + 4,000 = US$1,034,000
- Import duty = 1,034,000 x 10% = US$103,400
- CAP = 1,034,000 x (1+10%) = US$1,137,400
- VAT = 1,137,400 x 17% = US$193,358
- Port handling VAT = 3,000 x 6% = US$180
Under the FOB agreement, the import VAT (17 percent) and VAT levied on the service for port handling (six percent) would both be borne by the Chinese buyer.
The only possible way to reduce the import VAT liability for the imported goods would be to negotiate a lower transportation cost and insurance premium with the nominated freight forwarder and insurance company so as to reduce the CAP value and therefore import VAT. However, if the buyer is classified as a general VAT taxpayer, VAT paid for imported goods would be able to offset output VAT, potentially reducing their total tax burden.
In addition to this, there are certain items exempt from import VAT:
- Imported instruments and equipment to be used directly in scientific research, scientific experiments, or education;
- Imported materials and equipment donated as non-reimbursable assistance by foreign governments or international organizations; and
- Articles directly imported by organizations for special use by the disabled.
Professional guidance advised
When calculating import taxes and duties, it is essential for importers to be aware of the sort of contract being signed, and have understanding of the commonly used International Commerce Terms. Type of good being imported will also affect the amount of tax liability, and in some cases will be eligible for exemption from VAT. Consulting professional advisers on import tax and duties can ultimately help businesses save time and money.
Editor’s note: This article was originally published on January 31, 2014, and has been updated to include the latest regulatory changes.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
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