What Effect Does China's Value Added Tax (VAT) Have on Shippers?
Tuesday’s blog covered China’s new value added tax (VAT) reform going nationwide on August 1st. For the basics on what a VAT is and background on China’s VAT reform, check out that blog.
Tuesday’s blog is great for the inquisitive ones out there, wanting educational background on the VAT.
For those of you who are more pragmatic and want to know what this all means for you, today’s blog is what you want.
Today’s blog looks at how the implementation of the VAT replacing business tax (BT) across many industries and service types, including transportation services and logistics-related services, throughout the whole of China affects international shippers importing from or exporting to China.
Phew! That was a mouthful. To put it simply, here’s how China’s new VAT affects you.
Reading through the VAT reform material released by China can be a little cumbersome and confusing. There are all these different percentages as to what VATs will be for different services and it’s easy to feel if you’re not an accountant with a background in international finance you’re in over your head on figuring out what it all means.
Luckily for you (and me too), there’s no need to stress yourself trying to figure it all out. The big carriers like Maersk, Hamburg Süd, and MSC who operate shipping lines in China are on it.
VAT basically means tax incentives for them. Rather than paying a BT, they charge a VAT to their customers. VAT is good news for the carriers so they’re going to make sure they get it right.
As Maersk, Hamburg Süd, and MSC sent out notices that all said basically the same thing to their customers about China’s VAT program, you can be pretty sure the carriers are correct about how the VAT system works.
You’ve waited long enough. Here’s what China’s August 1st VAT implementation means to shippers:
- 6% rise in shipping costs for international shippers importing and exporting from and to China.
Hamburg Süd put it this way, “In compliance with the… policy, an additional 6% Value- Added Tax (VAT) will be levied on top of the freight and charges payable at China starting from 1 August 2013, based on the issuance date of the VAT invoice.”
MSC’s letter to their customers reads similarly, “In compliance with the… policy, an additional 6% Value-Added Tax (VAT) will be levied by MSC on top of all charges payable at China starting from 1 August 2013, based on the issuance date of the VAT invoice.”
To complete the trilogy, here’s Maersk’s version: “With the implementation of the Cai Shui  No. 37 Notice, Maersk Line would like to announce that from 1 August 2013, a value added tax of 6% is applicable for all charges pay at PRC [People’s Republic of China] only.”
The message is clear, perhaps it’s even sounding like a broken record at this point: VAT means an additional 6% cost in China shipping for shippers.
- What impact will China’s VAT have on the international shipping industry in general?
That’s a harder question to answer.
The international shipping industry is already a volatile one when it comes to freight rates.
For example, a few years back, we had a blog titled Freight Rates and Container Shipping Costs up 350% from China. Compared to that, 6% is nothing.
But to a small business doing international shipping between China and the U.S., 6% could be a significant figure.
It’s possible the new VAT policy’s cost increase to shippers could affect China’s import and export numbers. If affected negatively with any significance, carriers could see revenue losses and even overcapacity issues that have plagued their ability to maintain healthy freight rates instead of benefitting from having BT replaced by VAT.
On the other hand, if the program goes as China intends, shippers paying VAT instead of carriers paying BT could significantly help carriers’ bottom lines as they are still working on recovery from huge losses in 2011.
Sometimes a feeling of carriers vs. shippers exists; however, healthy cargo container carrier companies are better for the international shipping industry than carriers struggling and sinking, so to speak.
With all the factors affecting the costs of international shipping, I’m of a mind to predict China’s VAT reform will have little affect on the nation’s import and export numbers. This should mean a better bottom line for carriers shipping in China.
For shippers, there are enough factors from market demand to fuel bunkers to terminal costs and dockworker strikes affecting freight rates that VAT raising shipping costs in China by 6% will have ample opportunity to be balanced out.