China’s New VAT Pilot Program

 In Industry Insider, Trans-Border Global Freight Systems, Inc.

As of August 1st, 2013, China’s Ministry of Finance and the State Administration of Taxation has announced a new VAT Pilot Program.  The Notice on Tax Policy “Circular 37” now concerns the “transportation and modern services sector”.

What does this all mean?
It is important to understand that this new rule has been the subject of many discussions and that interpretation of this new rule may/may not be fully comprehended at this point. However, we feel it is important to at a very bare minimum explain to both the importer and exporter the fundamentals of this new policy so an overall awareness is created.

In the past, freight forwarding firms in China were able to enjoy a 6% refund from the Administration of Taxation for transportation services which in turn would allow them to reduce the amount of duties owed by them to the Chinese Government. However, with this new policy that is set to be introduced on August 1, 2013, forwarding firms in China will now be prohibited from being granted this refund. Therefore, the Government of China has implemented this new rule which effectively means that the 6% VAT charge will now be assessed on all prepaid transportation services in China.

How does this affect me and how I trade to and from China?
As we all know, shipping charges are determined by the negotiated Incoterms between the buyer and seller. This will determine which party will have to bear this additional 6% cost. The below is a simple breakdown of how this charge will be allocated:

Imports from China to the U.S.
–          Under EXW/FCA terms – the U.S. importer will bear the 6% charge on overseas inlands.
–          FOB terms – No additional fees for U.S. importer
–          Under CIF/CFR/CPT/CIP –Since these are prepaid terms, Supplier’s will likely add into their unit price / pass on costs etc to the buyer.

Exports to China from the U.S.
–          CIF/CFR/CPT/CIP – No additional fees for the U.S. exporter
–          Under DAP/DDP terms – U.S. exporter will bear 6% VAT on destination charges

Will this new rule affect trade competitiveness with China?
There is no certain way of knowing what overall impact this new rule will have on China’s trade with the global market. There are many factors and variables to consider when trying to determine the long lasting effects of this rule. Trans-Border is taking every precautionary measure to mitigate as much of this cost as possible.  It is important to remember that this is a pilot program and so it is inevitable the global industry will come together with their comments and thoughts. Time will tell!

Please note that Trans-Border is closely monitoring the situation and is moving your freight in the most cost effective option available.  This new policy does require some clarification from the Chinese government and we will keep you informed as updates occur. Should you have any additional questions, please contact one of our following managers via email or at 800-493-9444 should you have any additional questions!