BUSINESS |商业 26 ningbo focus July 2012 www.ningbofocus.com T Value Added Tax (VAT) is not as straight forward in P.R. China as in the ‘West’. To make matters worse, not all local finance managers working for FIEs are up to speed with respect to all of the elements of the VAT law which are relevant to you. The VAT competencies tied to foreign invested manufacturing companies (WFOE) tend to be good, while the same does not necessarily apply to foreign invested trading companies (FICE), with the result that finance managers with a manufacturing background may end up calculating the export VAT refund based on the regulations of a manufacturing company instead of a trading company. Such a comprehensive topic as VAT is ‘worthy a book’. Herein follows an executive summary of the VAT essentials: VAT Rate The applicable VAT rate is 17%. This rate applies to goods and not services (a trial project launched in Shanghai may result in VAT being introduced to services later on). Purchase VAT If presuming that the cost of the purchased goods is net RMB 100,000 before VAT, and presuming that the import duties tied to importing the same product amounts to 5% based on the applicable import code (HS code) of the product, the Purchase VAT will be calculated as follows: Note: The purchase VAT will remain ‘un- classified’ until the goods are being exported or sold domestically, whereupon the correct VAT refund classification will be made in your books. The purchase VAT is calculated in the same way for both manufacturing and trading companies. Sales VAT If presuming that the sales price of the sold VALUE ADDED TAX (VAT) For Foreign Invested Enterprises (FIEs) in Ningbo An executive summary of the applicable laws By Helge Hareland Helge Hareland goods is net RMB 180,000 before VAT, the Sales VAT will be calculated as follows: Note: The sales VAT is calculated in the same way for both manufacturing and trading com- panies. VAT Refund – Domestic Sales VAT is not refunded in cash, in connection with domestic sales, as the sales VAT is supposed to be larger than the purchase VAT. Should it ever occur that you still end up in a ‘net VAT receivable position’ from domestic sales, the receivables will simply be forwarded to the next period, and matched towards the sales VAT found therein. If using the numbers from the examples above, the net VAT receivables / payables will be calculated as follows: Note: A common practice, among quite many Chinese enterprises, involves holding back the issuance of the sales invoice until the client pays, in order to avoid having to pay the sales VAT before collecting the receivables from the client. Such a practice is strictly illegal by law, and can be penalised with a penalty equal to five (5) times the sales VAT plus 18% p.a. late payment interest (calculated from the date the sales VAT should have been paid and until the date it actually was paid). VAT Refund – Export Sales VAT is refunded in cash, in connection with export sales. The refund is not tied to the invoice date or export declaration date but the settlement date of your client abroad. Meaning, if you grant your client a sixty (60) days credit, you are also granting the tax bureau a similar credit on the VAT refund. Do note that you will have to pay 17% sales VAT, if the export sales invoice is being settled later than ninety (90) days counting from the export declaration date. Do also note that you will IF PURCHASED DOMESTICALLY IF IMPORTED FROM SUPPLIERS ABROAD Purchase price 100,000 100,000 Import duties 0 5,000 Sub total 100,000 105,000 Purchase VAT 17,000 17,850 Sum 117,000 122,850 IF SOLD DOMESTICALLY IF EXPORTED TO CLIENTS ABROAD Sales price 180,000 180,000 Sales VAT 30,600 0 Sum 210,600 180,000 VAT Sales VAT (180,000 x 17%) - 30,600 Purchase VAT (100,000 x 17%) + 17,000 Net VAT Payables 13,600 lose the right to be refunded in cash, if your company’s export ratio should drop below 50% of the total sales income. The VAT refund tied to export sales is cal- culated as follows: Export VAT refund = Purchase VAT – Non- refundable VAT The Non-refundable VAT (NRVAT) ratio is a function of the exported goods export declaration code (HS code). Furthermore, the NRVAT of a manufacturing company is based on the export sales price, and for a trading company, it is based on the purchase price of the exported goods. Let me illustrate this, by presuming that the NRVAT tied to the examples above is 5%. Then the net VAT receivables will be calculated as follows: My general advice to owners and managers of FIEs is as follows: (a) Do not take for granted that your company’s VAT is being calculated correctly. Do always obtain a second opinion from a competent third party in your own language. (b) The HS codes represents ‘the bible’ when it comes to both import duties and NRVAT. Make sure that you hire a competent and experienced person to head the import and export declaration works. ■ Photo by: Helge Hareland IF EXPORTED BY A MANUFACTURING COMPANY IF EXPORTED BY A TRADING COMPANY Sales VAT 0 0 Purchase VAT (100,000 x 17%) 17,000 17,000 NRVAT manufacturing (180,000 x 5%) - 9,000 0 NTVAT trading (100,000 x 5%) 0 - 5000 Net VAT receivables 8,000 12,000