Do you know how to manage offsetting input and output VAT for your business in China? VAT policies in China frequently change, making it essential you stay up to date on all the latest alterations to be in complete compliance and take advantage of favorable policies.

What is VAT in China?

China has a highly complex Value Added Tax (VAT) system. The system in China applies VAT each time a product or service moves through the value chain from one supplier to another, before finally reaching the end consumer. Each time the product has value-added or is enhanced in some way, an additional tax is added to the product before it moves to the next stop in the supply chain.

VAT requirements differ between a small-scale taxpayer and a general taxpayer. A small-scale taxpayer has revenue of less than 5 million RMB. A general taxpayer is a company that is over the small-scale taxpayer threshold. Therefore, the impact of which category you fall under can be pretty substantial.

How Does VAT Work?

VAT is calculated by taking the input VAT minus the output VAT. Output VAT is calculated based on the invoice prices as a specific percentage of the sale. On the other hand, input VAT is an allowance for accumulated VAT the seller has already paid for purchases related to the final output produced. All China companies need to register and pay the required VAT once a certain sales threshold is met. This can vary by region but is generally between 5,000 and 20,000 RMB sales per month.

People from the US, where there is just a flat sales tax for example, can have difficulty wrapping their heads around the difference between output and input VAT. Output VAT is what the business must calculate when a good or service is sold. Input VAT is included in the price when you purchase a good or service that you will perform further work on. Say you purchase a good for 200 RMB that already had 20 RMB in VAT paid on it. You then sell the same good for 300 RMB and 30 RMB due in VAT. Your output VAT would be 30, while your input VAT would be 20. Subtracting these two numbers, you get a VAT payable of 10 RMB.

What are the VAT Rates?

The standard VAT rate is 13%, with some variations based on industry. Many goods exported are subject to a zero-rated percentage for specific sectors. A 6% rate generally applies to services. Small taxpayers (as opposed to general taxpayers) are instead subject to a flat VAT of 3%.

The deductibility of VAT also varies based on status. General VAT payers can deduct input VAT before remitting tax owed, and only special VAT invoices ("fapiao") can be used as the basis and evidence for VAT deductions. General VAT fapiao cannot be used to deduct VAT. Additionally, China does allow a VAT rebate for exported goods (and foreign companies manufacturing in China are often unaware of this). For foreign-invested companies, they must also be registered as a general taxpayer to deduct VAT.

The Future of VAT

China is promoting the transition to electronic tax invoicing away from paper invoicing for VAT. This transition is expanding from consumer invoices now to B2B transactions. However, there are still no procedures for VAT to be charged on digital services provided by non-resident taxpayers to local Chinese consumers. Of course, many companies are trying to provide these services locally because of a better user experience on local servers provided by a local entity. Only time will tell the future rates and methods of payments for VAT in China.

Summary

Determining which level of VAT you are subject to and accurately calculating your VAT payable is no easy task. It requires due diligence and experience to avoid any mistakes. This is why many businesses decide it's more efficient to hire a professional for the job. In addition, since many companies do not need a full-time person to manage the volume of their transactions, they can often choose to outsource some or all of this function to a service provider.

Engage a legal advisor to help you efficiently review your business contracts with distributor, suppliers, and other partners to make sure you are legally protected. 

Contact us at inquiries@ChinaLawSolutions.com for more information.