Why does not the VAT rate decrease affect the FOB price?
By Victor Tu   Date:2019-11-09   Read:1796   [ Return ]

Why does not the VAT rate decrease affect the FOB price?

 

Recently, some exporters are consulting us that their customers (outside China) are requesting the decrease of the price for the exported product due to the VAT rate going down in China. The exporters are confused how to answer their customers’ question that the new policy does not affect the quote. Here are some points probably you could explain. 

 

  • When the goods are exported out of China, there are no VAT burden. The FOB price doesn’t include any taxes (i.e. VAT)

 

  • As a trader, when they purchase the goods, the input VAT is not part of the cost, VAT is a no-gain-no-loss game. The price without VAT is the actual costs for a company.

  • Now we assume, the VAT rate was 16% and now is 13%, the mark up is set by 20%, the selling price will be the same, and VAT refund rate is full percentage. how does it affect the profit margin?

 

 

Before tax cut

 

Purchase price without VAT is RMB 100, and input VAT is 16 (100*16%), the price with VAT is RMB 116.

 

The profit= cash from customer-cash paid to suppliers +VAT refund

        = RMB 120 (100*(1+20%))-116+16

        =RMB 20

 

After tax cut

 

Purchase price without VAT is RMB 100, and input VAT is 13 (100*13%), the price with VAT is RMB 113.

 

The profit= cash from customer-cash paid to suppliers +VAT refund

        = RMB 120 (100*(1+20%))-113+13

        =RMB 20

 

Result

 

The VAT rate change will not affect the profit margin for an exportation company, the main reason is that FOB price doesn’t include any VAT and VAT is a no-gain-no-loss game.