How Can A Contract Manufacturing Company Use VAT To Rip You Off?

The contract manufacturing company you use could be holding back a secret - a hidden weapon whereby they can somewhat invisibly increase your production cost: Value Added Tax.

China's Value Added Tax intricacies can be a confusing part of the deal. Factories pay the Chinese government a value added tax along the many steps of production.

Raw material is purchased and a tax is paid.
The product that is made out of that material is sold to a distributor who pays a tax.
Another tax is paid by the export company that buys from the distributor.
A VAT rebate may be available when the product is exported - up to 17% depending on the product classification. If the VAT rebate for your product is 15%, and 17% has been paid, then the Chinese government keeps 2% and the contract manufacturers exporting the goods gets to collect the 15% VAT rebate.

The Contract Manufacturing Company VAT Discount

When you are outsourcing production and getting bids from a factory, don't overlook the impact of the Value Added Tax. Did you know some of the VAT was eligible to be rebated, and that you could negotiate your production price down at the factory because of it?

Without knowledge of the VAT rebate on your product, you cannot begin price negotiation with factories, because you don't really know your true cost. wholesale market How would you compare a contract manufacturing company in China if you did not know that some manufacturers hide the fact that they'll be keeping the VAT rebate?

Since the VAT varies by type of goods, and some products are eligible for a greater percentage rebate; and since the product classification can be negotiated with the local customs bureau, a contract manufacturing company can work out a better rebate and not tell you about it, or only give you some of it.

Many factories lack import-export rights and proper VAT processing facilities. They are forced to use 3rd party trading companies which inflate the price and complicate the relationship.

Has VAT been paid at all? A contract manufacturing company may find ways to avoid paying VAT in the production phases, but the tax has to be paid sometime. If the plant you're dealing with has avoided the tax, there'll be a charge, and a potentially large one for all the taxes yet unpaid when you export. If the VAT is not paid the product will not be exported. Any contract manufacturing company offering an attractive "no tax price" in their bidding should be scrutinized. You can't avoid VAT altogether, and though it may be attractive at first, it'll be less so when you buy direct from the factory in China and find out later you can't export out of the country because of a lack of tax documentation.

If you begin to order more of the product in time, the supplier can't avoid putting the tax payment on their books. One day when you proudly place a large order and expect a good discount based on volume, the price increases instead because the contract manufacturing company can no longer hide or avoid paying the taxes up front. They're not going to pay it for you.