Recently, we received some inquiries from exporters that their overseas customers are asking for the decrease of the FOB price due to the VAT rate change (from 16% to 13% from April 1, 2019) and our clients want to know how they should explain the situation to their customers that VAT change will not affect the price. Now let’s take a closer at it.

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

2.       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.

3.       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

Summary

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.