31 May 2010
Planning Tips for Selling Imported Goods to PRC Buyer
A non-PRC trader is receiving requests from PRC buyers to sell goods on DDP terms. DDP is short for delivered and duty paid. In order to do more business with PRC buyers, the foreign trader is planning to set up a wholly foreign owned enterprise (WFOE), which will be used to import the goods into China, issue tax invoice and deliver the goods to the buyers situated inside China. The following information is available for the foreign trader: (a) CIF price of goods converted into RMB is 100, (b) import duty rate is 10%, and (c) the goods are not subject to consumption tax. A worked example of the sales projection of the imported goods together with the explanatory notes is given below:
[1] The CIF value is the transaction price as approved by the PRC customs. Note that the CIF price is converted from the foreign currency into local Renminbi in practice. Note also that cargo handling fee and inland carriage costs are not included here.
[2] The import duty rate will vary with goods. It is assumed that duty rate is 10%.
[3] Certain goods are subject to consumption tax. It is assumed that there is no consumption tax here.
[4] A 10% profit mark-up is used in this example. (i.e. 121 = 110 x 110%)
[5] The output VAT (20.57), the input VAT (18.7) and the balance (1.87) are excluded from the income statement. The buyer should bear the VAT and the Company is just acting as the collecting agent for the tax authorities.
[6] A stamp tax of 0.03% will also be imposed on amount of sales contracts, and the stamp tax is not included here since it is not significant in the computation. The VAT is not included here for reasons as mentioned in note 5 above.
[7] Local levies equal to approximately 10% on the amount of VAT payable will be collected from the Company. (i.e. 1.87 x 10%)
[8] The amount of selling, general and administrative expenses is assumed to be 50% on gross profits. (i.e. 5.41 = 10.81 x 50%)
[9] In the early years after the incorporation of the PRC trading company, the company is not permitted to distribute all of its after-tax earnings. Instead, the Company is required to transfer 10% of its after-tax earnings to reserves. The 10% statutory reserve is ignored here for simplicity sake.
[10] If the foreign investor is a Hong Kong company, then the income tax rate on dividends can be reduced to from 10% to 5%. In order to be eligible for the tax concession, the HK company must satisfy the criteria for resident enterprise as laid down in the Arrangement between the Central People's Government and the Government of HK Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion.
[11] The PRC government has amended the VAT regulations that took effect on 1st January 2009. The new VAT regulation provides that where the annual sale amount exceeds RMB0.8 million in a tax year, the PRC trading Company is required to pay VAT at 17% on sales. The VAT regulation also provides that the PRC Company is not allowed to deduct the input VAT from the output VAT if it has not completed the procedures for getting recognized as a VAT general payer, or if its annual sale is less than RMB0.8 million. In either case, the input VAT should be charged to the cost of sales in the income statement, turning the gross profit into a gross loss.
(i.e. 10.81 - 18.7 = -7.89)
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