Reminder: Understand VAT Rebates to Bargain More Effectively

At the beginning of the year, SourceJuice wrote an article 4 Reasons Sourcing from China will be More Expensive in 2008 with one of the main reasons for price increases listed as the change in VAT rebates. Today while reading the Spend Matters blog post Keeping Track of China’s Export Tax Rates and Rebates, we were reminded of the importance of understanding what the VAT rebates are and how to use this knowledge to bargain more effectively.

As Spend Matters points out:

One of the secrets to unlocking the total cost savings secrets of global sourcing is to understand where the profit margin from suppliers is coming from (hint: in China, historically it’s often come from a VAT rebate that is theoretically payable after to the trading or export company after goods hit the water).

So as a recap for our readers: What is the China VAT tax and why do you need to know about it?

When a factory purchases raw materials, either domestically or internationally, they pay a VAT tax. For those not familiar with the term, it’s basically a sales tax. However, if the materials are used to make a final good FOR EXPORT, then the Chinese government will issue a rebate of this tax. This rebate can be as high as 25+% on some items, so this is not insignificant.

Therefore, when a factory comes to you and wants to raise the cost of a product or you are beginning a new negotiation, one of the most common reasons the factory will give for higher costs is because of the decreased VAT rebate.

So… if you can prepare yourself with the correct information on what products have changes to the VAT rebate, and in general what your product’s VAT rebate is, you are that more empowered during the negotiation process.

Our friends over at MFG.com have put together a very solid PDF, which translates all the VAT rebates into English.

Last 5 posts by The SourceJuice Team

China VAT Changes List for December 2008 - November 19th, 2008
Expect More VAT Rebates with the new Economic Stimulus from China - November 15th, 2008
China VAT Changes for 2008 and 2009 – Rebates and More - October 23rd, 2008
Paying your Chinese Supplier – Know your payment terms and options in advance - October 5th, 2008
One Man's Challenge is Another Man's Treasure - Home Building Materials, part 4 - August 25th, 2008

Comments

4 Responses to “Reminder: Understand VAT Rebates to Bargain More Effectively”

Should You Diversify Your Supplier Base? | SourceJuice on May 1st, 2008 9:41 pm

[…] with the recent inflation in China, partly due to decreases in VAT rebates, many factories are raising costs hand over fist. When a factory decides to raise your costs, you […]
VAT Rebates Coming Back for Textiles and Garments | SourceJuice on July 10th, 2008 9:56 am

[…] For those unfamiliar with VAT rebates and their place within China sourcing, please have a look at this SourceJuice article Reminder: Understand VAT Rebates to Bargain More Effectively. […]
English China on September 2nd, 2008 3:10 am

Here we go!!!
China VAT Changes for 2008 and 2009 – Rebates and More | SourceJuice on October 23rd, 2008 2:30 am

[…] have such knowledge and know how the system works please read our prior post on SourceJuice.com. Go here for that […]