COVID-19 Response

Re-think China’s Value Added Tax (VAT) Policy for Global Sourcing


As we continue to see the reverse manufacturing trend from Asia to North America, we see that companies are facing a common issue related to China’s government regulations and how they handle their value-added tax (VAT) policies.  Although China has taken measures to reduce their VAT charges, VAT, still represents a significant “hidden” cost when manufacturing in China.

China uses a rebate program to help drive value-added taxes, Cost and Capital Partners, LLC a explains. The Chinese government issues rebates for VAT for different industries to help increase or decrease the activity of different industries in response to their short term economic goals and desired exports. The VAT rebates vary between 5 and 17 percent and are frequently in flux. As a result, costs to U.S. firms that do their manufacturing in China vary depending on what industries the Chinese government wishes to promote. For example, the VAT rebate for tires was approximately 5 percent in 2008, almost 10 percent in 2009 and then dropped to 0 in 2010. Another factor complicating this issue is that the VAT rebates reach American manufacturers in convoluted ways. The VAT rebates are not directly given back to the United States corporation. Instead, the rebates are negotiated between a Chinese company and local authorities; consequently, instead of money being given to the American company, the U.S. enterprise negotiates discounts with their Chinese partners on their costs based on the VAT rebates and the final commodities that are re-exported from China after value-added processing. To add another layer of complexity, factories in export processing zones do not pay any VAT. Overall, these processes add extra complexity and uncertainty for U.S. companies doing business in China, as it is difficult to predict what the VAT rebates will be and to ensure that VAT rebates are reflected in the U.S. company’s bottom line instead of being rerouted by Chinese partners and requires careful analysis from Chinese consultants and tax advisors to be done efficiently.

By comparison, Mexico handles VATs in a relatively straightforward way. There is no VAT for goods temporarily imported into Mexico for the purposes of value-added production. VAT only applies to goods that will remain in Mexico or that are purchased from Mexican suppliers even within that structure there are simple ways to reduce costs. Companies using a maquiladora can be exempt from VAT for certain types of goods or if the goods from the Mexican supplier are physically delivered to the maquiladora facility. Maquiladoras operating under the IMMEX program are also eligible for more rapid VAT refunds. Because the VAT in Mexico is less variable and easier to reduce, many companies are finding it as a cost saving on their product total landed cost when eliminating this duty in Mexico compared to their applicable China VAT.

Some Mexico shelter services providers take a very proactive role and handle the VAT so the client (a foreign company) receives the full VAT refund since is not part of the cost structure. Overall, the relative simplicity of VAT rebates when manufacturing in Mexico provides a distinct advantage for companies over manufacturing in China, as long as they work with a professional Shelter provider or contract manufacturer that understands Mexican fiscal law and is willing to create a long term partnership with its clients.

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