China Export VAT Refund
The VAT refund is a benefit granted to taxpayers engaging in export transactions to reduce the overall tax burden when exporting goods.
According to the exporting enterprise and the category of goods (HS code), the exported goods might fall in one of the following categories:
Goods that are eligible for output VAT exemption when exporting, and granting refund of the input VAT incurred at the date of purchase. Most of the exported goods fall into this category.
Goods that are eligible for output VAT exemption, but not granting refund of the input VAT. Goods falling into this category are generally goods for which the exporting enterprise has not paid input VAT at the date of purchase (if the enterprise incurred in input VAT, this is not recoverable. In such case, exporting enterprises could abandon the VAT exemption treatment and consider the export transaction as domestic sales, and offset output VAT with relevant input VAT); and
Goods that are not eligible for output VAT exemption, and not granting refund of the input VAT incurred at the date of purchase. Goods in this category have their export restricted or banned by the authorities, and their export transaction shall be considered as domestic sales, with input VAT incurred by the exporting enterprise creditable against output VAT.
To be eligible for the VAT exemption and refund, the goods shall be exported by qualified “export enterprises”, which have completed their administrative, tax, and foreign trade operator registration and are engaged in the export business. The mechanism of the VAT exemption and refund differs according to the type of activities carried out by the export enterprise:
the Exemption, Credit, and Refund (ECR) method applies to export enterprises engaging in manufacturing activities and exporting self-produced goods. According to the Exemption, Credit, and Refund method, the goods exported by the export enterprise are exempted from output VAT. Then the input VAT incurred by the export enterprise is offset with the output VAT arising from domestic sales. Subsequently, the excess of input VAT can be claimed for a full or partial refund. Goods exported by manufacturing enterprises under trading business mode would not be eligible for the refund.
the Exemption and Refund (ER) method applies to export enterprises engaging in trading activities, and exporting goods purchased from other entities. Based on the ER method, the goods exported by the export enterprise are exempted from output VAT, and the input VAT incurred when purchasing the exported goods can be refunded according to the VAT refund rate.
The refundable amount of VAT depends on the VAT refund rates associated to the exported goods. These rates can vary according to the government policies and can be 13% (full refund) or lower. If the exported goods cannot grant a full refund, then the non-refundable VAT shall be recorded as a cost for the exporting enterprise.
Enterprises engaging in export business can apply for the VAT refund by completing an administrative procedure at the time of the first tax refund filing. According to the Announcement of the State Administration of Taxation (2015) No. 56, the procedure requires the submission of the following documents:
Tax refund and Exemption Filing Form;
Registration Form of Foreign Trade Operator or the Certificate of Approval for Establishment of Foreign Invested Enterprises in the PRC;
Certificate of Registration for Customs Clearance Entities in the PRC.
other documents that may be required by the competent tax authority.
Once submitted the first filing, tax authorities may perform an onsite visit of the exporting enterprise in order to verify the business operations and if the enterprise has proper premises and staff.
Subsequently, export enterprises qualified for the refund shall submit the Declaration Form for Tax Refund of Production Enterprise to the tax authorities on a monthly basis, along with additional information related to the export transactions carried out, the proof of payment collection etc.…
Export enterprises applying for VAT refund must remind that they shall handle export refund applications related to export transactions carried out during the year before the half of April of the following year. In case of lack of documentation or improper filings, the export enterprise would be required to return the VAT refund and consider the underlying transaction as domestic sales subject to VAT.