Foreign Automotive Companies in China – Three Common VAT Issues

By Richard Hoffmann,  ECOVIS Beijing

The number of automobiles globally is estimated to grow from currently around 650 million to roughly 1.4 billion by 2030. As the largest and fastest growing market for automobiles worldwide, China represents the strongest force behind this growth. In line with the current 12th Five-Year-Plan, the Chinese central government in Beijing is pushing forward the transition towards fully electronic vehicles: by 2020 a total of 500 thousand fully electronic vehicles are planned to drive the streets of China.

Provincial Chinese governments therefore strongly encourage their local automotive industries to achieve this transition towards sustainability. In Shanghai, for instance, the purchase of a fully electronic car is directly subsidized with 40 thousand RMB. Besides promoting its own industry, local governments also recognise the importance of contributions from abroad, especially by European companies, through cooperation in research and trade of autoparts. Over the past decades, countless foreign automotive companies have set up their presence in China – whether exporting from abroad or importing from within the China, these companies may likely face the following three VAT issues.

Valuation of Products for Import VAT

When autoparts are shipped to China they pass through Customs Control where all relevant documents are inspected. China Customs pays close attention to the valuation of the products in order to ensure the proper payment of Import VAT – this tax is paid by the automotive importer in China and its current rate lies at 17 percent. When China Customs sees a discrepancy between the given valuation and its own estimates, it may raise a price query. The importer is then required to provide evidence that the given valuation approximates the price of a similar product which was previously sold to a third party and accepted by China Customs beforehand. If no evidence can be provided, the authority will set its own valuation which would most likely result in a higher Import VAT burden. ECOVIS Beijing therefore advises automotive importers to prepare a comprehensive explanation and carry out a circumstances-of-sales test to prove that the price was set on an arm’s length basis within pricing norms common to the automotive industry.

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Harmonised System Code for VAT Refund Rate

During the inspection process, China Customs also pays close attention to the Harmonised System (HS) Code given to the autoparts. This code determines the exact VAT refund rate – Input VAT paid when sourcing autoparts from abroad can be refunded when the automotive importer in China later exports the final products abroad. Usually the VAT refund rate lies at around 13 percent but it may vary according to the material of the item in question (composition of rubber, type of plastic and metal) as well as the physical state of the item (how it is assembled). China Customs may dispute the correctness of the HS Code provided in which case the automotive exporter in China would be fined for stating the incorrect code if it resulted in an over-refund of VAT. Due to the complexity of autoparts in terms of material and physical state, ECOVIS Beijing recommends that exporters carry out a detailed study of relevant coding issues through technical and customs specialists. This may cost time and resources but will prevent the export of autoparts from incurring costly fines.

VAT Refund when Manufacturing in China and Exporting Abroad

Compensation for Development of Products

Especially when supplying Chinese automotive brands in the green mobility sector, suppliers are often confronted with additional costs for developing technologies and moulds. In order to cover these additional costs, the supplier may require the automotive company in China to transfer a compensation in advance. However, the current foreign exchange regime makes it difficult for the importing company to legally transfer the compensation as no physical import of autoparts actually takes place. The automotive supplier therefore often reverts to raising the unit price of the product in order to obtain compensation. However, this practice does not generate the necessary compensation up front and simply applies the export VAT rate of 17 percent to a larger base value. ECOVIS Beijing therefore advises automotive exporters to sign an additional contract for the development of technologies and moulds. This practice ensures the payment of the development services up front which are subject to a lower VAT rate of just 6 percent and a surcharge of 12 percent on VAT.

	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com