by Mike Bellamy
To whom (or rather on which invoice) is VAT payable when purchasing from a UK supplier manufacturing goods in China which are being supplied ex-works? We have purchased goods from a UK supplier, which are manufactured in China. Our UK supplier has been unable to ship in the required time frame so has supplied the goods ex-works allowing us to arrange transportation via our own shipping agent. Our UK supplier is charging VAT on the goods and, at the same time, so is our shipping agent. It does not seem logical to pay VAT twice? Thanks.
Please check with your UK tax advisor about taxes on the importation, but here is some feedback on the China side VAT per your situation outlined above.
First off, if possible, (for small and medium sized orders) try to avoid purchasing ”ExW China” because this puts the burden of outbound customs, tax documentation and China side trucking on the buyer. Unless you have an agent in China or your own offices on the ground in China, purchasing EXW can be very complex, as you have learned. A common problem is that the China based-seller offers the buyer an attractive “ExW” price, but the buyer (or middleman) does not have the experience to ask if the ExW is with or without VAT tax paid receipts (known as “fapiao” in Chinese). If the goods are without receipts, taxes and official paperwork, it can be very costly to export. In some cases, the goods are stuck in China and can not be exported. For that reason, it is so important when searching for suppliers to focus on suppliers with export experience that can sell FOB. For small and medium buyers, I suggest purchasing “FOB port” rather than “ExW”.
With regards to your question about who pays the China VAT, technically, unless your UK supplier is a registered entity in China, they cannot legally process the VAT or arrange im-ex on their own. I am betting your UK supplier has a partner in China that is hitting them up for the VAT tax and your supplier is passing that cost on to you. I do not know the UK company in question, but I have seen many China factories use VAT smoke and mirrors to extract additional payments (profit) out of middlemen like the UK company who may not fully understand what they should really be paying when it comes to China VAT.
To make a long story short, if your order is low USD value and fairly small in size, your appointed shipper may be able to arrange a “gray channel” export where the goods depart China without the full paperwork. The down side is that there is no VAT rebate as it is unofficial export. If the order is large in size or value, consider having your logistics partner engage an agent with relevant import-export rights (example here) to export the product as well as organize the VAT rebate on your behalf.
At the risk of opening up more headaches for you…have you thought about how to process the VAT rebate when the goods leave China? If you have to pay the VAT in China, it is not so bad if you get most of it back as a rebate. But if you are paying twice, with no rebate, then you are right to suspect something is not on the level with your supply chain partners.
If you would like introductions to China based companies that can help you manage your supply chain in a more efficient fashion, please check out www.SourcingServiceCenter.com where I keep a list of endorsed service providers who have done a good job for me on similar cases.
BTW, if you felt the supplier let you down, do not forget about www.SupplierBlackList.com. This is a free service where you can explore a bad supplier and warn other buyers.
Let me know how things work out for you.