VAT Treatment
There is still one common misconception on the phantomatic “ VAT Exemption on Exports”. If the refund rate is lower than the levy rate, the company must bear the additional VAT cost on exportation. The VAT cost is calculated as follows :
Manufacturing Company :
VAT Cost = (Export – Imported Raw Materials excluding customs duty)×(Levy Rate – Refund Rate)
Trading Company :
VAT Cost = (The cost of Local purchased Raw Material)×(Levy Rate – Refund Rate)
Generally speaking, the levied rate is 17%, the refunded rate is 13%.
Customs Deposit on Imported Raw Materials To Be Subsequently Exported
We often hear the misconceived statement “There is no VAT and Custom Duty levied on imported Raw Materials used for manufacturing goods locally if these are then finally exported 100%”. It is incorrect. Actually, newly established Foreign Invested Enterprises must still make a tax deposit to Customs for VAT (at around 17%) and remit duty on the initial importation, for a period of time of generally six months. Many new businesses do not budget for this as initial working capital to be contributed as part of registered capital – leaving them short of operating cash later on.
Enhanced Profits Repatriation – Reducing Profits Taxes in Your Business
This is a tax issue, and applies to all FIEs that sell services or products in China. If no structural changes are made to your FIE articles, you lose out on between 4% and 13% of your total turnover in wasted unnecessary profits tax payments. FIEs, as mentioned earlier, are not just simple licencing applications, and if you treat them as such – you end up with an inefficient business.
Enhancing your China profitability by reducing your profits tax burden is essentially a matter of introducing into the business a series of allowable service contracts between the FIE and it’s parent company back home. These services can include :
- Royalties such as for trademark and patent use
- Interests
- Rental income
Royalties, interests and rental income rendered to the China FIE generally attract a withholding tax which rate is 10%. That means, if the income derived from above mentioned activity is USD1000, FIE located in China will withhold USD100 income tax for headquarter.
However, this compares favourably against the profits tax man at the year end, who is more avaricious. If the money is left in the company, the profits tax man will levy rates of either 15% (if in FTZ, SEZ and similar status zone), 24% (if in a municipality) and 33% if elsewhere (tax holidays excepted). That means payments in profits tax of USD150 if in a free trade zone, or USD240 or USD330 if elsewhere, obviously being less competitive in tax treatments.
Accordingly, to take advantage of this, an enhanced profits repatriation structure needs to be built into the FIE articles and inserted (they do not appear in normal drafts), and a series of contracts agreed between the parent and the FIE and registered with the tax authorities in China for assessment.
