Contract Manufacturing Companies- Trust Issues

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Contract Manufacturing Companies Trust Issues—Vol 1

How Can Contract Manufacturing Companies Use VAT To Rip You Off?

One of USA’s most reputable contract manufacturers wants you to know
that many contract manufacturing companies have a secret, hidden weapon whereby
they can almost invisibly, but certainly in many cases unexpectedly
increase your contract manufacturing cost: Value Added Tax.

To end users dealing with contract manufacturing companies, Value Added Tax
complexities in China can be either a very confusing part of a contract,
or an unmentioned part of the contract. Manufacturing companies pay the Chinese
government a value added tax along the many steps of product
manufacturing. First, raw material is purchased and a tax is paid; then
the product that is made out of that material is sold to a distributor
who pays a tax; and the export company that buys from the distributor
pays another tax. When the product is exported, there may be up to a 17%
VAT rebate available 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 manufacturing companies exporting the goods
gets to collect the 15% VAT rebate.

How Contract Manufacturing Companies Can Use VAT

When you are sourcing your project and getting bids from
manufacturers, don’t overlook the impact of the Value Added Tax. Did you
know about the VAT? Did you know some of it was eligible to be rebated,
and that you could get it, or negotiate the price down because of it?

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

VAT varies by product classification and some products are eligible for
a greater percentage rebate. An unknown further cost savings exists in
that fact: The product classification can be negotiated with the local
customs bureau. If a manufacturer can get a rebate, they may
not tell you about it. If you know about it, they may negotiate with
Customs to get more of a rebate and 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.

Caution: If the order is small, the factory may find ways to
avoid paying VAT in the first place. There would not be a rebate upon
export in this case, there’d be a charge, and a potentially large one
for all the taxes yet unpaid. If the VAT is not paid the product will
not be exported. Beware of contract manufacturing companies offering an attractive
“no tax price” in their bidding. Avoiding VAT may be attractive at
first, but less so when you buy direct from the factory in China, but
find out later you can’t export out of the country because of a lack
of tax documentation. As orders of the product increase in volume, 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 of business, you instead get a price increase because the
contract manufacturing companies can no longer hide or avoid paying the VAT up
front and has to pass that cost on to you.

Make sure you are aware of VAT, how it affects your cost, and how much
of it you can get back so you can understand the true cost of goods
sold.

If you don’t know what you don’t know, you cannot protect yourself. It
is part of our mission at Con-Tech to ensure you are well informed.

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