Below, we provide a brief overview of both these mechanisms.

China: export VAT refunds

To promote the export of goods, there is no VAT applicable to exported goods in China. However, when a company sources products in China, it is required to pay VAT. Normally, input VAT may be deducted from output VAT, but for exported goods, there is no output VAT. Therefore, the government has set up a system for the refund of export-related VAT refunds. Companies can claim back the input VAT paid related to export sales through the monthly export VAT refund claim.

There are two types of VAT refunds for exports:

1. VAT refunds for manufacturing companies

When manufacturing companies purchase materials, they receive an input VAT fapiao. (In China, a fapiao acts as both an invoice and a tax receipt.) After processing the materials, the company will sell its final products either domestically or as export goods. When selling in the domestic market, the company must pay output VAT; however for exports there is no output VAT.

The VAT refund is calculated as: input VAT – output VAT. Thus, if output VAT is bigger than input VAT, the company will not receive any VAT refund. In the case of exported goods, no output VAT applies, so the VAT refund will consist only of the input VAT.

2. VAT refunds for trading companies

For trading companies, the VAT refund is equal to input VAT paid for goods that are subsequently exported, as there is no output VAT on exported goods. Normally the VAT refund is calculated by subtracting output VAT from input VAT. Since for export sales there is no output VAT, input VAT cannot in theory be deducted.

Therefore, Chinese tax policy has created a VAT refund system based on the so-called ‘refund rate’. The Chinese government sets refund rates for product categories ranging from 9–13%. Depending on the refund rate of the exported products, a difference can exist between the input VAT and the VAT refund. Should the refund rate be lower than input VAT, the difference will be a cost to the company.

China: domestic VAT refunds

If a company’s input VAT is in excess of its output VAT, the excess amount of input VAT can be carried to the next reporting period. Previously, it was only possible to carry these amounts forward until it could be used to deduct the amount from output VAT.

Effective April 2022, qualified taxpayers may apply for a refund of excess input VAT, instead of carrying the full amount forward to the next accounting period. Qualified taxpayers include micro and small firms across all industries, and qualified firms in a list of industries including manufacturing, scientific research, transportation, and other areas.

With the implementation of this policy, companies have been able to apply for VAT refunds monthly as of 01 April 2022. Additionally, companies with outstanding VAT refund credits are able to apply for a one-time refund of the outstanding amount.

With nearly a decade of experience in accounting, Dream is a Partner at MSA. Her expertise lies in tax and HR, where she plays a key role helping clients navigate complex challenges. She also assists in other areas such as payroll compliance, corporate tax, and social security contributions.

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VAT refund policies in China