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How can my company avoid confusion over VAT payments and make the process go more smoothly?

Posted: 2011-09-30

Full Question

Our turnover is about US$10 million per year. But we have quality issues concerning PVC production and we must closely control it in China. We plan to sign an agreement with a film production factory, and they will sell to "finishing" factory to make the printing and packing. So we will have multiple contracts with multiple factories. In this selling transaction there is a lot of confusion about how VAT is paid and how the VAT rebate is processed among the multiple parties. Any thoughts on our strategy?

Answer

In my experience, unless you have your own legally registered entity in China, it is very hard to arrange "step by step" processing under multiple contracts in China. It may work if you don't have your own office but only if you have a third party who is licensed to do domestic and international trade. However, you really need to trust that third party. Otherwise, all the parties involved may collude with each other, but not let you know, and be tricky about the VAT and VAT rebate.

As your orders are large, I have a few suggestions:

  • Consider setting up your own office in China. You can keep costs down by outsourcing the accounting and VAT processing to a third party. But legally you would have an entity 100% under your control, which you could use to buy and sell raw materials between Chinese companies and then export under your own name to get the VAT. This option gives you the most transparency and control. If you would like to learn more, I'll be happy to put you in touch with a company that has helped me in this area.

  • Another option that gives you transparency would be to outsource your buy-sell and VAT processing to a trusted third party. Such companies may charge a monthly retainer of a few thousand US dollars to manage the vendors plus a percentage of PO value to process the VAT.

  • What I do in similar cases is to make the raw material supplier the official spec that your processor needs to use. For example, I help a first tier supplier to many of the major names in the PC industry buy millions of US dollar of goods each month. We work with the client to find the Bill of Material (BOM) and negotiate prices. We then force the processor (the company that converts the BOM into a finished product ready for export) to buy from the authorized BOM subsupplier at the pre-agreed price and sell to client FOB China port at the agreed price. The key step is that a third party (my team) is at the BOM supplier daily to watch the quality. Although we aren't buying the BOM and sending it to the processor, we do have the power to stop production and tell the processor not to pay the BOM supplier if there are quality problems.

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