Importers based in the European Union must pay Value Added Tax (VAT) on top of the Customs value. In this article, we help you navigate the complexities of ‘Import VAT’ when buying from China.
Keep reading, and learn more about VAT calculations, and whether or not Import VAT is deductible.
We also explain how and when you declare and pay VAT, and much more.
What is Value Added Tax (VAT)?
VAT is a consumption tax in the European Union. In B2C transactions, VAT is always included in the price. If you, for example, buy a product online from an EU based online store, the price you pay includes VAT.
The seller can then offset the VAT it ads on its sales, to the VAT it paid to other other EU businesses, when buying products or services.
Below follows an example:
• Sales: $10,000 (Including VAT, 20%)
• Expenses: $5,000 (Including VAT 20%)
This allows us to make the following calculation.
• Sales VAT: $2,000
• Paid VAT: $1,000
• Total: $2,000 – $1,000 = $1,000
Thus, I would need to pay $1,000 of VAT. If I’d spent more on VAT than I added on top of my sales, I would instead get money back from the state.
However, when importing goods from China, you can’t pay the VAT directly to the supplier. Simply because Chinese businesses belong to a different tax system, and are not VAT registered in the EU.
When importing products, the same principle applies. If you pay more VAT on your imports than you add on your sales, you’ll get a refund.
What is a Customs Value?
As the VAT calculation is based on the Customs Value, you need to be familiar with this term to understand the examples provided in this article.
In the European Union, the Customs Value is the total sum of the products (including development costs paid to the supplier) and shipping to the border.
Below follows an overview:
Always included in the Customs Value
• Product cost (as paid to the supplier)
• Shipping cost to the Port of loading
Sometimes included in the Customs Value
• Tooling and molds
• Product samples
• Design services (and related development services) paid to the supplier in China
Not included in the Customs Value
• Transportation fees within the EU
• Fees and services paid in the Port of Loading
Do I need to pay VAT when importing from Asia to the EU?
Yes, importers must pay VAT on top of the total sum of the Customs Value and the Import Duty.
VAT is paid to the state, in the country of entry and according to the local rate.
If I import goods to Spain, I pay VAT in Spain, according to Spanish VAT rates. If I am based in the UK, I pay the UK rate, to the HMRC, and so on.
How can I calculate the amount of VAT I must pay?
Yes. However, before you can do that you must know the following factors:
• Customs Value
• Import Duty Rate
• VAT Rate
Below follows an example:
• Customs Value: $10,000
• Import Duty: 5% ($500)
• Sum: $10,000 + $500 =$10,500
• VAT Rate: 20% (UK Rate)
• Total VAT: 20% x $10,500 = $2100
• Total Amount: $10,500 + $2100 = $12,600
What is the VAT rate in my country?
So far, each EU member state sets its own VAT rate. Each state can also set different VAT rates for different products or services – or even implement exemptions (0% VAT).
However, most products are taxed according to the standard VAT rate. You can find a full list here, or see the list below for a few EU states:
• United Kingdom: 20%
• Sweden: 25%
• Italy. 22%
• Germany: 19%
• Netherlands: 21%
When importing from China, how and when do I pay the VAT?
There are two ways to pay VAT when importing goods from China:
a. Pay VAT upon arrival in the Port of Destination
Most Freight forwarders offer Customs clearance as a paid service. As such, they help you declare Customs duties and VAT to the local authorities.
The Freight forwarder invoice the buyer for the total amount (Import duties and VAT).
b. Declare the amount of Imported goods on the quarterly or yearly VAT declaration form
All VAT registered companies in the European Union must fill in a quarterly or yearly (sometimes even monthly) VAT declaration.
In the VAT form, there are fields for declaring the total amount of Imported goods, from which the local tax authorities can calculate a VAT amount.
The benefit is that the importer can then offset this amount directly from the amount of “sales VAT”.
Can I deduct the VAT amount paid?
Yes, the amount of VAT you pay on your imported goods can be subtracted to the amount of VAT you shall pay on top of your sales invoices.
Company A is based in the UK and imports products valued at $20,000 from a supplier in Hong Kong. During the first year, they only manage to sell goods valued at $15,000. This gives us the following:
• Sales VAT: $15,000 x 20% = $3,000
• Paid VAT: $20,000 x 20% = $4,000
• Balance: $3,000 – $4,000 = -$1,000
Given that they’ve already paid in more than the amount they are owed, Company A is eligible for a VAT refund. However, this may be reduced to zero in some cases.
Do I need to pay VAT when buying product samples?
Yes. There are two ways VAT can be paid on product samples:
a. Upon arrival in the EU member state
b. Declared as part of the Customs value of the first shipment
Are there any exemptions for importers?
Some EU member states set VAT thresholds between 10 euros to 22 euros. Hence, small sample orders may pass through without VAT being added.
Do the Customs authorities add VAT to every shipment?
No, it’s up to the importer to properly declare the value of the imported goods in the quarterly or yearly VAT declaration.
Fredrik Grönkvist is the co-founder of ScandinAsian Enterprise in Shanghai. Since 2010, he and his team have helped hundreds of companies worldwide, primarily in the EU and US, to develop and manufacture products in China. He is also the main contributor on www.chinaimportal.com, a leading knowledge base for small- to medium-sized enterprises importing from Asia. For further questions, you can contact him on www.chinaimportal.com/contact-us/