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What types of taxes are payable domestically for transit trade and what are the specific tax payment rules?

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I am the person in charge of a foreign trade company, and I have recently been engaged in transit trade of electronic components from Southeast Asia to Europe. During an on-site inspection by the tax authority last month, it was pointed out that there are ambiguous areas in the declaration of our transit transactions, which may involve underpaid taxes.

I am extremely anxious now. I neither know exactly what taxes shall be paid for transit trade in China, nor the specific declaration procedures and compliance requirements, and I am more worried that improper operation will lead to fines or even damage the enterprise's credit record.

In addition, I heard that some transit businesses can enjoy tax preferences, but I do not know whether we meet the eligibility conditions. I hope experts can elaborate on relevant rules, procedures and risk mitigation methods for domestic tax payment of transit trade.

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Expert Answer

Robert
RobertYears of service：6Customer Rating：5.0

Warehouse Management AdvisorStart a Chat

The domestic tax payment for transit trade follows the core principle of "taxation only on domestic-sourced income". No value-added tax or customs duty is required，and only the profits generated in the transit link are subject to corporate income tax.

First of all，pre-document review shall ensure a closed loop of the entire transaction chain: keep the goods bill of lading，overseas procurement contract，overseas sales contract，payment receipts and vouchers，and transit warehouse receipts issued by third-party logistics providers，to prove that the goods have not entered the Chinese customs territory，and the domestic enterprise only acts as an intermediary for transaction matchmaking.

In the core declaration link，the transit trade income shall be listed separately when conducting the annual corporate income tax reconciliation and settlement，to calculate the taxable income amount. If the transit trade income accounts for more than 30% of the enterprise's total income，a special report on transit business shall be submitted separately，explaining the transaction mode and income composition. If the enterprise uses an offshore account for foreign exchange collection and payment，it shall simultaneously explain the capital flow to the tax authority to avoid being recognized as a domestic taxable transaction.

For abnormal response plans，in case of tax inspection，the complete set of transaction documents shall be submitted immediately to cooperate with the tax authority in verifying the goods ownership transfer path. If the transaction is mistakenly determined as general trade，the enterprise may apply for administrative reconsideration and provide supporting documents such as warehouse receipts and logistics track records of the transit business.

For final compliance implementation，a document retention system shall be established，and all documents shall be kept for no less than 10 years. Meanwhile，the enterprise shall regularly sort out the transit trade process，to ensure that the goods ownership，capital and contract of each transaction match with each other，and avoid logical loopholes.

Emily
EmilyYears of service：3Customer Rating：5.0

Client Success AdvisorStart a Chat

The core of customs declaration for transit trade is to clarify the attribute of "goods not entering the territory". The enterprise shall submit transit record for the transit goods to the customs, and provide documents such as overseas procurement contract, overseas sales contract, and copy of bill of lading, to ensure that the words "transit trade" are marked in the remarks column of the customs declaration form. If the goods enter the domestic bonded zone for special reasons, the enterprise shall go through the bonded warehousing record procedures, and the goods shall not flow into the domestic market.

If the information on the customs declaration form is inconsistent with the actual transaction, the enterprise shall apply for deletion and re-declaration in a timely manner, to avoid being recognized as general import trade and triggering the risk of supplementary payment of customs duty and value-added tax. Meanwhile, the enterprise shall pay attention to the customs valuation rules for transit trade, to ensure that the declared transit service fee conforms to the fair market value, and avoid customs clearance delays caused by valuation disputes.

Sophia
SophiaYears of service：7Customer Rating：5.0

Senior Customs AdvisorStart a Chat

The calculation of corporate income tax for transit trade shall distinguish between domestic and overseas sourced income, and only the profits generated from services such as matchmaking and logistics coordination provided by domestic enterprises in the transit business are taxable. If the enterprise adopts the related party transaction mode, it shall follow the BEPS rules, ensure that the related party transaction pricing conforms to the arm's length principle, and avoid the taxable income being adjusted by the tax authority.

In addition, qualified transit enterprises may apply for recognition as enterprises in cross-border e-commerce comprehensive pilot zones, and enjoy the preferential corporate income tax verification collection policy, with the verified taxable income rate not exceeding 4%. It shall be noted that if the transit goods involve domestic processing or warehousing, the corresponding part of income shall be accounted for separately, and relevant taxes shall be paid in accordance with general trade rules.

Daniel
DanielYears of service：8Customer Rating：5.0

Legal AdvisorStart a Chat

The collection and payment of foreign exchange for transit trade shall comply with cross-border payment compliance requirements. SWIFT or CIPS system shall be used for foreign exchange collection and payment, and relevant transit trade documents including contracts, bills of lading and invoices shall be submitted to the bank when making foreign exchange payment, to ensure that the capital flow is consistent with the goods ownership transfer. If an offshore account is used for foreign exchange collection and payment, the enterprise shall regularly submit the income and expenditure status of the offshore account to the State Administration of Foreign Exchange, to avoid being recognized as illegal capital flow.

Meanwhile, the enterprise shall pay attention to foreign exchange rate fluctuations, and lock the exchange rate risk through forward foreign exchange settlement and sale, to avoid income shrinkage caused by exchange difference. In addition, a collection and payment ledger shall be established, and the payment vouchers of each transaction shall correspond to the contracts and bills of lading one by one, to ensure that the capital chain is clear and traceable.

William
WilliamYears of service：10Customer Rating：5.0

International Logistics AdvisorStart a Chat

The transit trade contract shall clearly specify the node of goods ownership transfer, so as to avoid tax and legal risks caused by vague contract clauses. The contract shall specify that the goods never enter the Chinese customs territory, and the domestic enterprise only acts as an intermediary to provide matchmaking services, and the goods ownership is directly transferred between the overseas buyer and seller.

Meanwhile, a force majeure clause shall be added to clarify the party that bears losses caused by force majeure such as customs inspection and logistics delay. If letter of credit settlement is involved, soft clauses shall be avoided, to ensure that the terms of the letter of credit match the transit trade process, and avoid dishonor caused by discrepancy. In addition, the qualification of overseas transaction counterparties shall be reviewed, to avoid transactions with unrecorded overseas enterprises which may lead to compliance risks.

Sarah
SarahYears of service：3Customer Rating：5.0

Foreign Exchange AdvisorStart a Chat

Transit trade does not fall into the scope of export tax refund. Enterprises shall avoid mixing transit income into export tax refund declaration data, otherwise tax verification inquiries will be triggered. If the enterprise carries out both general trade export and transit trade at the same time, the documents, funds and income of the two types of businesses shall be accounted for separately, and independent ledgers shall be established.

In case of tax verification inquiry, relevant transit trade documents shall be submitted in a timely manner to prove the authenticity of the business, and avoid being recognized as false export. Meanwhile, the enterprise shall comply with the "four flows consistency" requirement, the contract flow, capital flow, goods flow and invoice flow of transit trade shall be matched, to avoid tax risks caused by inconsistent four flows.

John
JohnYears of service：6Customer Rating：5.0

Export Tax Rebate AdvisorStart a Chat

For supply chain planning of transit trade, domestic bonded zones shall be prioritized as transit nodes, and the duty-free warehousing policy of bonded zones shall be utilized to reduce operating costs. The logistics path shall be reasonably planned to prevent the goods from entering the general trade supervision area in China, and ensure that the goods ownership is always transferred overseas.

Meanwhile, an inventory linkage strategy shall be established, and the transit storage volume shall be adjusted according to the demands of overseas buyers and sellers to avoid overstock. In addition, the cost of transit trade including logistics fees, service fees and taxes shall be precisely calculated, to maximize the income. It shall be noted that if the transit goods belong to sensitive categories, the enterprise shall learn about the regulatory requirements of the destination country in advance, to avoid goods detention caused by compliance issues.

Note: We respect all users' opinions and contributions. However, comments and answers reflect the views of their respective authors only.
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