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What recourse does my company have if our Chinese supplier doesn't want to give us the VAT discount?

Posted: 2011-09-30

Full Question

My company is located in Russia. We import cotton from China.

The problem is that the price we pay for yarn is on the terms of FOB-NINGBO with VAT included in the price. Our supplier is filing for the VAT refund but doesn't want to give us the VAT discount.

Is it appropriate to insist on getting the VAT discount?

Answer

Under FOB terms, the supplier is responsible for paying the VAT tax up front and collecting any VAT rebate at export. In other words, the supplier has already calculated the VAT situation into FOB price quoted to you. Under FOB terms, it is not the norm in China for the supplier to refund the VAT to the buyer, unless you have made special arrangements in advance. Such special arrangements should only be made in cases where the two sides have a lot of trust and experience working together.

Furthermore, because it is very easy for the supplier to distort how VAT affects the final price, in your case below, it's wiser to focus on negotiating the final FOB price than on negotiating based on the VAT rebate.

For example, a supplier could say something like "the VAT rebate is 11%, and supplier will give the buyer 7% of the 11%." Sounds great. But if that supplier has a special relationship with the tax bureau, they may be getting the full 17% back and keeping the 17-7, which is a lot different than 11-7. Unless you are well versed in the VAT system, you will have a hard time finding out what really happens.

To make a long story short, focus on the FOB price and let the supplier worry about the VAT. If you're buying ExW or consolidating orders at a central point in China before shipping, then VAT becomes a bigger issue.

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