Calculating Taxes and Duties for Import to China

The taxes involved in import to China include import duties, value-added tax (VAT), and possibly consumption tax (CT) if the product being imported falls under CT specified categories. For foreign trading companies engaged in the business of selling (or import) to China, it is wise to be fully clear about the relevant tax issues before rushing into signing any sales contracts, because the amount of import taxes and who would be ultimately liable for those taxes largely depends on how the sales contract is concluded between the foreign seller and the Chinese buyer.
 
International Commercial Terms (a.k.a. Incoterms) published by the International Chamber of Commerce (ICC) are widely used in international commercial transactions to help communicate the costs and risk-bearing associated with the transportation and delivery of goods. “CIF” (Cost, Insurance, and Freight) and “FOB” (Free On Board) are probably the most common price terms that have been adopted by international trading companies when signing a contract. “CIF” implies that the seller would be responsible for the freight and insurance to bring the goods to the port of destination; the buyer pays for the freight and insurance if a “FOB” pricing is agreed upon.
 
The amount of import taxes and customs duty payable is calculated based on the price or value of the imported goods. This value is called the Duty Paying Value (DPV) which is determined based on the transacted price of the goods. It includes transportation-related expenses and insurance premiums on the goods prior to unloading at the port of arrival in China. Taxes, such as VAT or CT are not included in the determination of the DPV.
 
The Composite Assessable Price (CAP), which is another important term for the topic, is the total of DPV, import duty, and CT if applicable.
 
Below is how the rationales are shown in formulae:
DPV = Cost of goods + Transportation cost + Cargo insurance
Import duty = DPV * Tariff rate
CAP = DPV + Import duty = DPV * (1+tariff rate)
VAT = CAP * VAT rate
 
To further elaborate the calculation of import taxes, we’ll use the example of a Chinese company deciding to purchase machinery from a European company which has concluded a contract using FOB price. FOB price means the Chinese buyer would arrange the freight, and the related shipping cost and insurance premium would be borne by the Chinese buyer. The European company only needs to load the machinery on the board of the ship nominated by the Chinese buyer and clear the goods at the customs for export.
 
Hypothetically, the expenses that need to be considered are as follows:
 

• Cost of the machinery: US$1,000,000
• Freight: US$30,000
• Insurance premium: US$4,000
• Import tariff rate: 10%
• Import VAT rate for machinery: 17%
• Port handling: US$3,000
• VAT rate for port handling service: 6%

 
Import duty and VAT:
DPV = 1,000,000 + 30,000 + 4,000 = US$1,034,000
Import duty = 1,034,000 * 10% = US$103,400
CAP = 1,034,000 * (1+10%) = US$1,137,400
VAT = 1,137,400 * 17% = US$193,358
Port handling VAT = 3,000 * 6% = US$180
 
Under FOB, the import VAT (17 percent) and VAT levied on the service for port handling (6 percent) would both be borne by the Chinese buyer. The only possible way to reduce the import VAT liability for the imported goods may be to negotiate a lower transportation cost and insurance premium with the nominated freight forwarder and insurance company so as to reduce the CAP value and therefore import VAT.
 
That being said, if the Chinese buyer is a General VAT taxpayer, they would be able to use the VAT paid for the imported goods to offset their output VAT, so that their total turnover tax burden could potentially be reduced.
 
This article was first published on China Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
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