Exporters expect little benefit from China VAT cut [UPDATED]

By William Clarke
Published: Tuesday, 12 March 2019

The low levels of VAT that metal and mineral exporters currently pay in China will mute the effect of a planned tax cut.

A three-percentage-point cut to the rate of value added tax that Chinese manufacturers of metals and minerals pay will have little effect on export markets, traders said.

Market sources claim that the low levels of VAT exporters pay now will make the reduction more theoretical than actual.

The Chinese prime minister Li Keqiang announced the tax cut on March 5. The top rate of VAT, which is levied on manufacturers - including producers of industrial minerals - will fall by 3 points to 13%. The total value of these tax cuts is estimated at $90 billion per year. 

This follows a one-point cut to the top rate of VAT to 16% in May 2018.

A portion of the VAT can be rebated for some exported goods, but there is no remittance on mineral exports. This means that, in theory, the cut could deliver a saving of 3% on the pre-tax price of any material bought from China.

China is a major exporter of a large number of metals and minerals, including antimony, bismuth, refractory materials, pigments and ceramics.

But traders downplayed the effect of the cuts, noting that a large volume of mineral sales already avoid VAT.

The Chinese government unveiled a massive overhaul to the existing export system in 2018 to cut down on tax avoidance.

Although many exporters are still getting around the tax, market participants reported to Fastmarkets.

"A lot of material is coming from alternative channels, there are different ways to avoid VAT, I'm not sure what impact this [3% increase] will have," an antimony trader said.

A refractories trader noticed the same pattern in the alumina and bauxite markets, with little impact on price expected.

"On the face of it, you’d think prices would be lower," the trader said, but many producers already get around the VAT restrictions, for example, by shipping from the special economic zone in Shenzhen, he added.

"There will be a little relief for a short time but 3% is not such a big number," a European trader said, adding that a potential increase to tariffs in the United States could be more important.  

A number of Chinese exports, including bismuth, cobalt, and titanium dioxide currently attract a 10% tariff on entering the US, a tariff that could rise again if trade negotiations between Washington and Beijing do not bear fruit. Antimony was initially included on the list of proposed tariffs but was removed in September 2018.

"The big number is the 25% increase on tariffs and that is the big deal," the trader warned. We have to look at the tariffs."

But the response to the news was more positive from bismuth exporters.

"For some enterprises that are fighting a shortage of cash flow, the tax cut could be a relief," one Chinese bismuth exporter said.  "Because they bear less of a tax burden, therefore the profit of the company will be increased, the cash flow will be improved as well," the exporter said.

"The tax cut is undoubtedly a good thing for the export enterprises," a second Chinese bismuth trader said.  

While an antimony exporter noted the move could be good for domestic demand for the material.

By William Clarke, Cristina Belda and Huaqing Fu

This article was first published on March 8 and was corrected to reflect that antimony was excluded from the list of Chinese materials facing a tariff when imported to the US.

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