Export VAT Refund: China Export VAT refund revoked for 406 items
The Chinese Ministry of Finance and the State Administration of Taxation issued a circular on 22 June 2021 that revokes the export VAT refund for 406 items. Circular 57 becomes effective on 15 July 2010, using the export date listed on the "Customs Declaration Form (Export Refund Only)" as the date of reference. The circular affects six categories of products and reverses the trend during 2008 and 2009 of increasing the export VAT refund rate.
Under China's VAT regime, exporters may be entitled to a refund of VAT when their goods are exported. The amount of the refund depends on the export VAT refund rate, which ranges from 0% to 17%.
The export refund rate often does not allow for a full refund and so, for many companies, adds to the cost of manufacturing for export in China. The government made significant adjustments to the export VAT refund in 2007 by eliminating or reducing the rebate for more than 2,800 commodities. The government stepped back from the 2007 policy in 2008 and 2009 when it increased the export VAT refund rate to enhance China's competitiveness and expand exports.
The products affected by Circular 57 are mainly products considered to be high polluting, high energy consumption or domestically sourced goods that are scarce. Revocation of the export VAT refund aims to discourage exports of the affected goods. With the recovery of China's economy, the government has re-launched its strategic plan to address environmental concerns and improve the quality of exported goods. As compared to the 2007 reduction in the export VAT refund, this round of changes is relatively prudent.
The six groups of products affected by Circular 57 are:
- Steel products;
- Nonferrous metal products;
- Silver powder;
- Alcohol, cornstarch;
- Pesticides, pharmaceutical and chemical products; and
- Plastic, rubber and glass products.
Most of these products currently enjoy a 9% or 5% VAT export refund rate, which will be revoked from 15 July 2010.
Although the number of goods affected by Circular 57 is smaller than those affected by the 2007 changes, the export VAT refund rate is now actually revoked, whereas in 2007, the rate for most of the affected goods generally was merely reduced. The consequences of the revocation of the export VAT refund are probably more significant for the following reasons:
- Although the goods are exported, the supply will be deemed to be a local supply and subject to the 17% VAT on the value of the goods exported, which is payable by the Chinese exporter; and
- As the sale is deemed to be a domestic supply subject to the 17% VAT, the Chinese exporter is entitled to a full recovery of all VAT incurred on its costs of the goods exported.
These changes impact the pricing of exports, so companies should look at their current and future financial modeling to understand the overall cost of exports - particularly if the pricing has been fixed in a contract and the 17% VAT cannot be passed on to the customer.