China has promulgated a series of regulations to reduce import-export taxes and duties to promote a higher level of openness and domestic consumption. These changes could affect companies that import and export taxable goods and services to China.
Governing this intricate system is a central list of general principles for foreign companies to abide by. Below, we explain the three types of taxes applicable to companies importing products from or exporting products to China – Value-added tax (VAT), consumption tax (CT), and customs duties, and outline the most significant issues relating to these taxes and duties that foreign companies should take note of.
Value Added Tax for Imports and Exports
The import of goods is subject to import VAT, which is supervised and collected by local customs at the time of customs declaration. Entities or individuals importing goods – usually the consignee of the imported goods – are considered import VAT payers. Import VAT paid is deductible from output VAT paid when selling the products after import.
VAT= COMPOSITE ASSESSABLE PRICE x VAT RATE
COMPOSITE ASSESSABLE PRICE= DUTY-PAID PRICE + IMPORT DUTY + CONSUMPTION TAX
Foreign entities or individuals providing taxable services are subject to VAT, with some exceptions:
- The taxable service provided to Chinese entities or individuals is consumed completely outside of China (e.g., equipment rented and used outside of China for an overseas project of a Chinese company);
- The intangible property provided to Chinese entities or individuals is consumed completely outside of China;
- The tangible property leased to Chinese entities or individuals is only used outside of China; or
- Other circumstances specified by the MOFCOM and SAT.
Export VAT refunds
An “export VAT refund” refers to a refund of part or all of the VAT already paid on export goods and are subject to zero rate VAT, meaning VAT will not incur during export, and the VAT paid when manufacturing the export goods domestically is refundable.
There are two ways of obtaining VAT exemption and rebate benefits:
- Exemption, credit, and refund method (ECR method); and
- Exemption and refund method (ER method).
The ECR method is applicable only to production enterprises qualified as general taxpayers (no credit and refund is available for small-scale taxpayers). An exemption means that goods that are exported by production enterprises either directly or on consignment through foreign trade companies are exempt from output VAT.
Credit means that for enterprises whose self-produced goods are both exported and sold domestically, the input VAT credit on materials purchased for the production of export goods is offset against the output VAT on domestic sales.
Refund means that after offsetting the input VAT against the VAT payable, any excess amount of input VAT is refundable.
The ER method is applied to the export of goods or services by export enterprises or other enterprises with no manufacturing capabilities. Under the ER method, the output VAT of the exported goods is exempted, and a certain portion of the input VAT is refundable but not creditable.
Consumption tax for imported goods
China’s consumption tax (CT) is imposed on companies and organizations that manufacture and import taxable products, process taxable products under consignment, or sell taxable products.
Imported products taxable under China’s consumption tax include those that are harmful to one’s health, like tobacco or alcohol, luxury goods like jewelry and cosmetics, and high-end products, such as passenger cars and motorcycles.
For imported goods, the consumption tax rate varies depending on the type of product being brought into the country.
Calculating consumption tax can be done by using either the ad valorem method, the quantity-based method, or the compound tax method. The formulas to compute the consumption tax are as follows:
- Ad valorem method
Consumption Tax Payable = Taxable Sales Amount × Tax Rate
- Quantity-based method
Consumption Tax Payable = Taxable Sales Quantity × Tax Amount per Unit
- Compound tax method
Consumption Tax Payable = Taxable Sales Amount × Tax Rate + Taxable Sales Quantity × Tax Amount per Unit
Customs duties include import duties and export duties, which are computed either on an ad valorem basis or quantity basis.
Import duty rates on import goods consist of:
- Most-favored-nation (MFN) duty rates;
- Conventional duty rates;
- Special preferential duty rates;
- General duty rates;
- Tariff rates for quota items; and
- Provisional duty rates.
Among others, MFN duty rates are the most commonly adopted import duty rates. They are much lower than the general rates which apply to non-MFN nations.
The amount of import taxes and customs duty payable is calculated based on the price or value of the imported goods. This value is called the duty-paying value (DPV). DPV is determined based on the transacted price of the goods.
Import taxes and duties can be calculated after determining the DPV and the tax and tariff rates of the goods. The formulae are:
Ad valorem basis:
DUTY PAYABLE = DPV X TARIFF RATE
DUTY PAYABLE = QUANTITY OF IMPORTED GOODS X AMOUNT OF DUTY PER UNIT
DUTY PAYABLE = DPV X TARIFF RATE + QUANTITY OF IMPORTED GOODS X AMOUNT OF DUTY PER UNIT
Export duties are only imposed on a few resource products and semi-manufactured goods. In 2022, China imposed export duties on 106 items, including lead ores and concentrates, non-alloy aluminum strips, benzene, etc. The tax base for export duties is the same as import duties, i.e. the DPV. The DPV for export duties is based on the transaction price, i.e. the lump sum price receivable by the domestic seller exporting the goods to the buyer. Export duties, freight-related expenses, insurance fees after loading at the export spot, and commissions borne by the seller are excluded.