Coronavirus & VAT in 2020: “In times like these…” Mark Twain answers

Coronavirus & VAT in 2020: “In times like these…” Mark Twain answers

"In times like these, it is important to remember there have always been times like these". - Mark Twain

China Sourcing, Coronavirus & Value Added Tax (VAT) in 2020

In this blog post, we will answer the following questions:

  1. Why is it important to understand the VAT system in China if you source made-in-China products?
  2. Why would China change the VAT rebate rates in 2020?
  3. How would this impact your business?

Why is it important to understand the VAT system in China if you source made-in-China products?

China’s Value Added Tax (VAT) and Rebate system is complex and can be very confusing.  But if you are buying from China, understanding the basics of how the system works is a strategic imperative.

If you if you know the VAT rebate amounts on the products you are buying from China, you can learn your supplier’s true internal costs.

VAT rebates have changed over time and your current vendor may be pocketing the VAT rebate rather than passing it on to you.

A vendor may tell you they are only getting a certain % back, when in reality they have a secret agreement and a very different rebate rate.

Many vendors lack import‐export rights and proper VAT processing facilities. They are forced to use 3rd party trading companies which inflate the price and complicate the relationship.

If you want a primer on the China VAT system, check out our recent post “VAT Rebates: Negotiating power tool of China’s Value Added Tax System that covers the following in great detail:

How the VAT system works in China manufacturing

Games Suppliers Play

How to know if the supplier is playing games with VAT on your order?

    • EXW without Tax Receipts
    • EXW with Tax Receipts:
    • FOB China Port

Why would China change the VAT rebate rates in 2020?

In the years leading up to the current Coronavirus crisis, Beijing has been aggressively pivoting away from an economy based on manufacturing-for-export towards a consumption-based economy.

Accordingly, they have incentivized consumer spending in the following ways:

  1. The minimum wage has gone up and up for over a decade. For consumerism to work in China, or anywhere for that matter, a middle-class with disposable income is necessary.
    Side note: Consumption is indeed on the rise and if the US-China trade war ever cools down, US exporters will benefit from a rising Chinese middle-class.
     
  2. China has reduced the import duties and VAT rates across many product categories. This has the net effect of making goods and services less expensive, thus increasing consumption.
     
  3. China has reduced the VAT rebate rates available to exporters of “undesirable” industries. These targeted industries produced lower-end; labor-intensive products made by unskilled laborers at minimum wage. Reduction of the VAT rebate disincentivized those targeted industries and China was happy to see the factories relocate to places like S. Asia and S.E Asia.  You could say that China wanted to say good bye to “socks and underwear” while keeping “iPads” and other so-called value-added products where the manufacturers tend to pay higher wages.

It is clear that the powers in Beijing did the macro level math and had a target for just how far they could build up a middle-class at the expense of the manufacturing sector.  But I doubt they built in a buffer for the Trump trade war, let alone the Corona virus!

The China economy has been hit hard in early 2020, especially the manufacturers. If too many factories close there will be a spike in unemployment and the potential for social unrest. Preventing social unrest is something Beijing takes VERY seriously.

My favorite Mark Twain quote is ...

“in times like these, it is important to remember there have always been times like these”.

So, what tools did China engage to prop up manufacturing in troubled times of the past- like during SARS or the Global Financial Crisis?

Two immediately jump to mind:

  1. Devalue the Chinese currency to promote exports.
  2. Increase the VAT rebate to subsidize exports and stimulate the manufacturing base.

Historic Benchmarks:

Examples of situations where the VAT rebate was increased on short notice to heat up manufacturing:  https://www.psschina.com/china-business-blog/vat-rebate-in-china-buyers-save-more/

Examples of situation where the VAT rebate was decreased on short notice to cool-down certain industries: https://www.psschina.com/china-business-blog/understanding-vat-in-china-todays-perspective-on-the-2007-changes/

Prediction 1:

Playing around with the USD-RMB exchange rate risks getting China classified as a currency manipulator by the US, especially if Trump is in the White House.  That leaves VAT in China’s tool box.  I would not be surprised at all if the VAT rebates for exporters are increased substantially in during 2020.

Prediction 2:

If VAT rebates increase for exporters, it is safe to say that Chinese sellers will not pass the savings on to the overseas buyers unilaterally. Most buyers have no idea how the China VAT system works, let alone know how to monitor the rates and negotiate a discount with their suppliers.

Opportunities/ Homework:

  1. Get yourself educated on how VAT really works in China.
  2. Don’t expect to learn about the VAT rebate changes on the evening news. Get ahead of the curve and develop a relationship with somebody in the know (like a consultant, licensed customs broker or even a friendly supplier) so that you will have a head’s up on any changes to the rates.
  3. Use that information to negotiate better pricing with your suppliers. Hopefully, your competitors may not even be aware of the opportunity!

Related Content:

How to get up to speed on the China VAT system?

Option 1: DIY

Here are blog posts I wrote for the China Sourcing Information Center:

Option 2: Hire an Advisor

Consider engaging AsiaBridge Law’s Business Advisory Service if you need help with VAT issues in China.  AsiaBridge Law’s Senior Business Advisor Mike Bellamy is the architect of an industry leading VAT consulting practice at PassageMaker. For more info, check out https://www.psschina.com/solutions/processing-vat-rebate-in-china/

 

Pro Tip: Free VAT Rate Search

If you contact the author via https://www.asiabridgelaw.com/contact-us/ with your product’s HS code, China port and estimated USD value of the shipment, Mike’s team will look up the VAT rebate rate for you, our complements.   Happy to help!

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About the Author: Michael J. Bellamy

About the Author: Michael J. Bellamy

Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses.  Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.

A featured presenter on China issues at seminars, trade shows and corporate events across the globe.

Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/

Mike is the author of “The Essential Reference Guide to China Sourcing
(available on Amazon).

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