China VAT Implementation Update

China VAT Implementation Update

China VAT
China’s Ministry of Finance

Officially, it’s called Cai Shui no.37 (Circular 37) “Tax Policy Regarding Nationwide Implementation of VAT Pilot Program on Transportation and Modern Services Sectors”.  What it means is a new China VAT for transportation amounting to 6% on all freight and some services related to freight.

Starting 1 August 2013, China imposes the VAT on ocean and air freight and related carriers’ charges that are paid in China.

Here’s how the China VAT may affect your business

·  Not at all:  If freight charges are paid in China and billed to a Chinese exporter (CIF), the exporter can claim it as an output tax and have it refunded.

·  Overseas Customers: If the shipment is either an export from China (EXW) or an import into China (DDP) and the overseas customer is responsible for local freight charges (e.g. THC) the VAT is passed on to the customer.

· Ocean Freight: For ocean shipments where the freight charges are paid in China but the sell rate is collected at the overseas destination, the VAT is paid by the overseas customer.

· Air Freight:  Shipments by air are all subject to the China VAT.  U.S. importers who primarily ship by air from China will especially be affected by the new China VAT.  This is because it is usual to pay airfreight at origin.

· Trucking and Warehousing: These costs are not subject to the China VAT.

There’s still some uncertainty about the new China VAT.  Industry players are seeking clarification on the new rules and how they are applied from China’s Ministry of Finance.  For now, ocean carriers with shipping lines in China have announced that they are compliant to the new China VAT  and that the 6% will be levied on all freight charges in China.  A carrier collects the 6% from shippers and then pays that to China’s Ministry of Finance.

Basically, this new China VAT stipulates that all freight charges paid in China are subject to the VAT.  The tax is passed on to customers inside China, who can recover it as an output tax refund.  However, if the customer is located outside China, it’s a new, additional cost.  It seems like a good idea to get used to the fact that shipping from China has increased by 6%.  Think of it as a sales tax.




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