Risks of ‘supplier-provided rebate’ in international trade

By Wang Yongliang, AllBright Law Offices
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A peculiar sales model, “supplier-provided rebates”, refers to the situation where a supplier sells something to a buyer at one price, and the buyer then sells the same goods to a third party at a lower price. The seller then usually does one of the following: rebates cash to the buyer; allows the buyer to offset subsequent payment for goods at an agreed rebate value; or gifts the buyer with a batch of the goods for additional profit. The idea is to retrospectively adjust the consideration in the original transaction so the buyer can recover its losses from the price difference.

Risks of ‘supplier-provided rebate’ in international trade Wang Yongliang
Wang Yongliang
AllBright Law Offices

Companies should pay additional attention to supplier-provided rebates, especially when concerning international trade, as they might involve customs or tax-related complications. If proceeding solely with the mindset of a regular domestic trade, the company may be unable to accomplish this type of sale. It also invites added risks by raising red flags for regulators.

Supplier-provided rebate is not a term commonly applied and accepted in international trade. Its origin can be traced to the second paragraph of article 1 of the Circular of State Taxation Administration Imposing Circulation Tax on Partial Income of Commercial Enterprises from Suppliers, which provides that “rebates received by business enterprises from the suppliers, if linked up with the sales volume or amount (calculation based on the proportion, amount or quantity), should be offset against the current input value-added tax (VAT) according to relevant regulations without being subject to business tax”.

To better illustrate the risks of supplier-provided rebates in international trade, consider the following example.

An overseas parent company exports its goods to its domestic subsidiary at a CIF of RMB100, referencing the global pricing manual. The subsidiary, after clearing the shipment with the customs, resells the goods to domestic non-related clients. One such client with a particularly large purchase volume requests the subsidiary to sell the goods at a 90% discount. The subsidiary, pressured by the size of the client, reluctantly accepts. At the same time, the subsidiary requests the overseas parent to compensate for its losses in the form of quarterly settled rebates.

As supplier-provided rebates in international trade involve compliance with both customs and tax-related regulations, companies must be familiar with rules on both fronts to make a sound judgement.

Customs-related risks

Is the dutiable value affected? In the above example, the discount provided by the domestic subsidiary to the non-related clients did not occur at import, but in domestic trade. Hence, dutiable value for the imported goods declared to customs was not affected, with no tax amount altered nor losses incurred. Customs, satisfied with the payment of all due taxes, will not interfere in the subsequent domestic trade.

Direction of rebate. Depending on the nature of provider and receiver, there can be a world of difference between one rebate and another. While the example does not involve customs risks, with the overseas parent company rebating to its domestic subsidiary, it may be a different story if their roles were reversed. A rebate provided by the subsidiary to its parent overseas may be regarded as indirect payment, or come under suspicion for concealing the true price by splitting one outbound payment into two. Consequently, customs may initiate an appraisal to adjust the dutiable value.


The operation in the example is markedly different from regular supplier-provided rebates in domestic transactions. As the subsidiary’s sale to its non-related clients constitutes domestic trade, while the overseas parent company’s supply to the subsidiary falls under international trade, for import certification, the latter requires a customs VAT payment voucher instead of a VAT special invoice. Nevertheless, such transactions should follow the same taxation rules as domestic supplier-provided rebates. The subsidiary is therefore subject to substantial risks both in enterprise income tax (EIT) and VAT.

For EIT, while the domestic subsidiary made up for the deficits in taxable income with rebates, it may defer recognising such income due to the arrangement of quarterly settlement, thus running the risk of being fined for overdue tax payment. By the time it makes the supplementary payment, the company may find that it has snowballed into an enormous sum. Moreover, if the subsidiary receives rebates by offsetting the value against future transaction considerations, it may also alert the tax authority due to the excessively low purchase price and irregular tax activities.

For VAT, the company must determine if the rebate is linked to the sales amount or other indicators. According to relevant regulations under the circular, if the rebate is linked in any way to the sales amount or volume, it should be treated as a supplier-based rebate and offset against VAT.

Wang Yongliang is an associate at AllBright Law Offices

Allbright-Law-Offices 锦天城律师事务所

11/F and 12/F, Shanghai Tower
No. 501 Yincheng Middle Road
Pudong New Area, Shanghai 200120, China
Tel: +86 21 2051 1000
Fax: +86 21 2051 1999


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