As the world financial crisis has taken hold, China's Central Government moved to increase the value-added tax (VAT) refund rates on several industries in an effort to boost production. For example, China has increased the tax rebate on textiles at least four times over the past six months, most recently increasing the rate to 15 percent from 14 percent in February. In October of last year, the Ministry of Finance raised export tax rebates on 2,486 different types of products, an estimated one quarter of all exports listed by Chinese customs authorities.
So exactly who qualifies for export tax rebates? There are two important concepts to understand: the "exemption, deduction and refund" method, and the "maximum refundable amount."
The exemption, deduction and refund method and formula are generally applicable only to production enterprises qualified as general taxpayers (there is no refund for small-scale taxpayers), which are either directly engaged in export or which consign goods to other import and export enterprises for export.
Exemption, deduction and refund are defined as:
1) Exemption: Goods which are exported by production enterprises either directly or on consignment through foreign trade companies are exempted from output VAT.
2) Deduction: This applies to enterprises whose self-produced goods are both exported (directly or through export agents) and sold domestically. The input VAT credit on materials purchased for the production of export goods is offset against the output VAT on domestic sales.
3) Refund: This applies if there is excess input VAT above that amount retained for credit (to be carried forward).
Exemption, deduction and refund calculation
VAT Payable = Output VAT - Input VAT + Non-Refundable VAT
Non-Refundable VAT=(Export- Imported Duty Free Raw Materials) × (Levy Rate - Refund Rate)
If VAT payable is a positive figure, then the enterprise will have to pay VAT to the tax bureau; if it is negative, then the tax bureau will refund the enterprise.
Maximum refundable amount calculation
Maximum Refundable Amount = (Collection Amount From Overseas for the Export Sales - Duty Free Imported Raw Material) × Refund Rate
Assumptions for the example are shown in the following table (in this case, we assume there is no custom duty applied).
Since the refund rate is different from the levy rate, export-oriented enterprises shall bear additional tax burdens, which ultimately will affect profit and loss.
Export tax rebate and exemption declaration procedures
Export enterprises must follow up formal registration of tax refund to apply for a VAT refund or exemption. They should submit the following documentation to the responsible tax authority for the approval of registration, which should be obtained within 30 days from the date of export approval:
- Declaration form;
- Business license; and
- Documentation approving their export operation issued by the Ministry of Commerce.
After a production enterprise carries out export procedures and records the sales in their financial statement—based on the requirements of their accounting system—it can apply to the tax bureau for VAT payment and exemption and deduction, and to the same bureau for VAT refunds.
The application period for a tax refund is from the first day to the 15th day of the following month. When an enterprise applies for a VAT payment and exemption or deduction, the following documentation needs to be provided:
- Declaration of VAT payment form and other required forms such as the declaration form of VAT exemption, deduction and refund for production enterprise, issued and approved by the local tax refund authority;
- Export invoice, import and export declaration form, cancellation and verification from the State Administration of Foreign Exchange, in accordance with the customs handbook; and
- Other documents as may be required by the tax authority.
For newly incorporated manufacturing companies, accumulated negative VAT payable for the first 12 months cannot be refunded—this amount will be refunded in the 13th month in one lump sum. If the company cannot collect money from overseas customers for export sales, it also cannot obtain a refund on time. If the company cannot complete the VAT EDR (effective date of registration) filing for export sales within 90 days (for example, the goods are shipped outside of China and the export declaration form is obtained in January, but the VAT EDR filing is not completed prior to the end of March), these export sales must be deemed local sales, and are liable for 17 percent VAT.
The author is the Senior Legal Associate of Dezan Shira & Associates' Beijing Office (www.dezshira.com)