Last week we described the painful process of opening a Chinese company. That was actually the fast and easy part. There’s still a pile of paperwork and months of waiting ahead. This week we look at the proper, and improper, ways to export from China.
A Chinese import export permit is permission to exchange foreign money to Chinese RMB, and refund sales / VAT tax on exported products. Imports, exports, and foreign currency exchange are attached to your permit number. Any trader operating in China without one is illegally exporting and violating the currency control laws, and is not a reliable supplier in our view.
Our license was handled by an agent, we literally did nothing but hand over the company documents. It took about a month and cost around 5000RMB ($900USD). It isn’t hard to get, but is difficult to use for small scale stuff. Our giant CPA firm even botched our first attempt to get a VAT tax refund. Continue below for more on the right and wrong way to export from China, and a summary of the crisis that almost ended our Chinese company this week.
How to export from China. The legal way.
This is the biggie. It took lots of trial and error, but to the best of our knowledge this is the proper way to export products from China and receive payment in foreign currency.
1. Receive foreign currency (USD,EUR, etc) payment by wire to the company bank account
2. Go to the bank, show an invoice for products and the import export permit
3. Money is converted to RMB. The amount and purpose is reported to government
4. Purchase products and get the official ‘fapiao’ VAT tax receipt
5. When the products leave China get a stamped export declaration form from the shipper
6. Take the VAT tax receipt and export declaration form to the tax office to rebate the 17% VAT tax. Many people skip this step. It is quite a hassle with very specific timing requirements. Unless you ship a container load of the same thing, or something very expensive, it is generally not worth the effort to get a VAT refund
7. Give the export declaration form to the accountant. The government will audit to see if the amount of currency converted to RMB matches the products exported
The tricky thing is the export declaration form. It is not a simple commercial invoice or proof of shipping. It has to come from an authorized authority with the correct stamp. It costs 300RMB ($50USD), and you need one for each package exported!
For example a simple 5x5cm $14 Dirty PCBs order. To convert that payment to RMB to pay the factory and refund the 17% VAT we need an export declaration form that costs $50 for this order alone. Unpossible.
Why are we still doing this?
So how do you deal with this? Hong Kong company to the rescue! Instead of shipping individual orders directly to hackers from China, we export the PCBs in bulk to Dangerous Prototypes Limited Hong Kong. For a while it looked like we had to rent a warehouse in Hong Kong and hire people, but eventually we found a service to do it for us.
Xiao Tang packages PCBs into boxes and puts on all the postage labels in China. A logistics company picks up the boxes, imports them to Hong Kong as a single shipment, and drops them at the post. They charge 300RMB to handle the customs export inspection and prepare an export declaration form. Now we can exchange money to pay suppliers and refund VAT.
It seems like Seeed Studio has had to make big changes to comply with this in preparation to go IPO. Small(er) Chinese companies have a different standard of accounting and compliance requirements, but when you take a bunch of government money and prepare for public listing many more rules apply.
We’ve noticed our stuff go out of stock at Seeed a few times recently, evidently while they move between Hong Kong warehouses. Our guess is they had to ship all or most of their stock to Hong Kong to refund the VAT and get the export declaration form required to exchange currency.
We’re a WFOE, which means we are held to the highest standard from day one.
How to export from China. The wrong way.
There’s a number of loopholes and unsavory practices foreign and Chinese agents use to circumvent the currency control system.
The process we describe above is only to pay for products. Payments for services can be converted with a simple invoice. So a small Chinese company might do a production run of 100 PCBs, but bill the client for consulting services. This seems so widespread for small stuff that bankers and accountants openly encourage it.
Each individual can freely convert $50,000USD to RMB each year. According to our CPA, around 70% of foreign business with Huaqiangbei market traders is paid to the boss’ personal account. This way the boss avoids paying VAT, and they don’t need an export declaration form to convert foreign currency to RMB. We won’t pay suppliers this way until a lawyer says it is actually legal to convert funds for business. Even if it is legal, $50,000 doesn’t go far for any sizable production.
A variant on the above is to recruit Chinese people to “rent” you their yearly allotment. You wire $50,000 to their account and they keep a percentage. This is so fraught with risk and uncertainty it hardly seems like a way to run a company, but it does seem like a good way to have your money stolen…
No experience here yet, but some general observations.
The import export license can be used to import and pay taxes on stuff coming into China. For example microcontrollers. Tax is generally 17%, and can be refunded when the chips are exported in a finished product. It is a bit of a hassle, especially for a small production run, but it is very doable.
In practice, almost everyone doing production in China has some variant of a story where they smuggle chips into the country in a backpack, pants pocket, etc. Foreign engineers becoming smugglers and tax cheats, over a 17% tax that’s refundable.
Supply chains are delicate enough already, you want to throw SMUGGLING into the mix!?!? Do you want your production held up for a month while you re-source chips because you got busted smuggling them into China to cheat a 17% tax? Then DON’T SMUGGLE!
Always ask your Chinese supplier for a copy of their import export license! It is at least moderate assurance your money won’t be stolen on the way into the country, and that your products won’t be confiscated on the way out.
Open a company bank account
So after months and months of work we finally have a Chinese company! But wait, it isn’t really useful with out a bank account that can convert foreign currency to RMB. This took nearly three more months.
Here’s the strange thing: Chinese banking rocks. Fees are non-existent or super duper low. Foreigners can walk in off the street, open a personal account, get an ATM card on the spot, and sign up for internet banking, all for free with a small initial deposit (~$20USD, ~120RMB).
Business banking is a whole other thing. First we went to Bank of China, cause, you know, they’re huge and international. They wanted to schedule a call in a week to setup an appointment for next month, not ok. We visited PingAn, ICBC, Communications Bank, and a few other smaller banks that weren’t even licensed to work with foreign owned companies.
Eventually we landed with China Merchant’s bank, simply because they would actually meet with us. Pro tip: choose a bank close to home or office, you or your employees will be spending a day a week there for as long as the company operates. Almost every major transaction needs to happen in person.
After more than a month we received permission to open a bank account from the People’s Bank Of China central banking authority. At this point the import export permit was finished and we entered another month of waiting for approvals before the account was open.
Even with a bank account and import export license we still can’t run the damn company. We have to “inject” the 400,000RMB of capital, then convert it from USD to RMB.
The 400,000RMB in foreign currency is wired from the business owner, the HK company, to a special single-use capital injection account. When the money arrives, appear in person to convert up to 300,000RMB per day for operating expenses.
If you want to withdraw and convert capital to pay a supplier, say for PCBs, you have to submit already-paid tax receipts. Our accountant describes this as an “incomplete system”: you can only use company money to buy products, but you can’t get company money until you can prove you paid for the products and taxes. We had pay for stuff with personal money pulled from an ATM machine so we could get the tax receipts so we could get money out of the company. Which came first: the chicken or the fapiao?
China Merchant’s Bank has reasonably workable English (likely Windows only) crapware for managing accounts. It comes with two USB certificates, one for the accounting department and one for the administrator.
Each transfer is first entered by the accounting department login, then the administrator has to login and approve. It’s pretty burdensome for a small business.
At least the developers seem to care about the user experience. “Check if there is enough fun”. Indeed.
For the big ones, not the small ones
One theme that keeps popping up: China is still built for big business. The plus side is a real company with real no-bull expenses and tax deductions. But, while the bank software would be great for an organization of 100+, but it stinks for a couple hackers who want to export a few PCBs. Similarly, it is easy to export a shipping container load of stuff, refund VAT, and convert payment to RMB, but you gotta hack the system to ship a $14 PCB order.
Maybe this is why such a large gray market export economy is allowed to thrive in China. Foreign and local agents are exporting products, which China encourages, but the system is incomplete and overly burdensome for small companies and individuals to be fully compliant.
A blind eye approach could be much more effective than reworking the whole system. After all, currency control largely exists to prevent big (foreign) interests from speculating and manipulating the Chinese economy. The spirit of the law isn’t to bust an eBay Arduino seller for illegal exports.
For those of you following along on WeChat #shenzhen_hacker_bei, some of this might seem familiar. We reviewed our business plan with the accounting firm multiple times, but still had a moderate crisis last week.
The accountant specifically told us, in writing and on multiple occasions, that a fapiao tax receipt was sufficient to get a VAT refund. We show up with fapiaos from the PCB factory for a refund. They pull out the example export declaration form – no refund without it, and by the way, no currency conversion either. It was obvious our accountant simply had not done it before. Rather than ask the head CPA, she just parroted incorrect conventional wisdom from her colleges. Idiots.
For most of the week we thought we were tanked. After multiple visits with lawyers and accountants we pieced together the full picture described in this post, and it seemed impossible to continue without renting a Hong Kong warehouse.
Yesterday we finally found the logistics agent willing to handle the export for us and provide an export declaration form. Hopefully these extended write-ups save someone anguish in the future.
Company. Check. Import export license. Check. Bank account with money. Check and check! But wait! We still need the work permit and residency permit! Add another 2 months before we can actually run the company. More on that process next week.