China VAT Reform And Its Effects To Importers And Exporters


There have been many newsletters circulating around especially for the past 2 months regarding VAT tax policy which went into effect on August 1,2013. This new policy will effect all importers and exporters from/to China depending on the freight terms so it is a major reform. But what it is exactly? How will you get effected? Well, let’s take a look at it.

Very briefly

1. According to the requirement of People Republic of China (PRC) State Administration of Tax, customer is required to pay a 6% Value Added Tax as well as relevant supplementary taxes to the PRC government with respect to OCEAN FREIGHT, including both import and export, SURCHARGE and LOCAL CHARGE that is paid in the PRC.

2. Steamshiplines claim and some argue it is a new tool for the steamshiplines to increase their profit that China Value Added Tax is a pass through charge that Carrier will collect on behalf of the PRC government and remit it to the government, not as a Carrier charge or surcharge.

3. The effective date of August 1,2013 is for invoice issuance date not bill of lading issuance date. For example, the shipment with gate-in date of July/27 and on-board date of July/30 might be imposed of China Value Added Tax if shipper applied the invoice on August 1. But if the invoice is issued on July 31, the VAT will not apply.

The taxation reform, which is being implemented on a trial basis, has been extended to transportation firms in China.  Maersk, the world’s largest shipping firm, announced earlier this month that it has postponed its plan to collect a 6% value-added tax. However, many other shipping firms have already begun levying the tax which will total 6.78%-6.83% after adding land tax.

One detail to note that before this reform, freight forwarders in China enjoyed a 6% refund from the Administration of Taxation for transportation services This would allow them to reduce the amount of duties owed by them to the Chinese Government. With this new reform, freight forwarders in China will not be enjoying this refund anymore so it’s effecting not only the importers and exporters but also Chinese local forwarders as well.

How does this affect importers and exporters?

The party that will bear the additional %6 cost will be determined based on the incoterms.

Imports from China to the U.S.

1-Under EXW and FCA terms: The U.S. importer will bear the 6% charge on overseas inlands.

2-FOB terms – No additional fees for U.S. importer

3-Under CIF/CFR/CPT/CIP: Since suppliers pay the charges in China for shipments that are arranged under any of these terms, they might add this additional cost to commercial invoices and pass them to buyers.

Exports to China from the U.S.

1-CFR/CPT/CIP/CIF: No additional fees for the U.S. exporter.
2-DAP and DDP:U.S. exporter will bear 6% VAT on destination charges.

Confused? You aren’t alone. Although all notifications were sent and this reform went into effect as of August 1st 2013, there are still many uncertainties, the biggest one is whether the steam shiplines are exempt from this tax or not since almost all carriers have offices in China where the billing is originated.

Time will tell exactly how the real affects of this new reform will be on US Importers and exporters. If as an importer you are thinking basically, switching the freight terms from CIF to FOB may save you on this cost, you may want to think again as the shippers are expected to reflect this cost to the unit cost of the product and eventually as importer you might end up paying for the VAT no matter the freight term is CIF or FOB.

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Serkan Kavas
Serkan Kavas was born and raised in Turkey. He graduated from Dokuz Eylul University with a Degree in Business Administration in 2001. He had an internship in Germany at a major industrial company after college. He worked at their family business in Turkey and managed their exports from Turkey to Europe. He moved to the U.S. to continue his education in New York and obtained his MBA degree with International Business concentration at New York Institute of Technology in 2005. After graduation he was recruited by MTS Logistics and he has been working at the company since 2005. Serkan worked his way up from the entry level to operations manager and to his current position as our VP of Imports at MTS Logistics. He wears different hats daily with different responsibilities. He has vast knowledge, experience, and understanding of all aspects of logistics, freight, and the supply chain. His focus now is to help develop our import department and help our company move forward.