Risks of “supplier discount” in international trade

A A particular sales model, “supplier-provided discounts”, refers to the situation where a supplier sells something to a buyer at a given price, and the buyer then sells the same goods to a third party at a price inferior. The seller then generally does one of the following: cash delivery to the buyer; allows the buyer to offset subsequent payment for the goods at an agreed redemption value; or offers the buyer a bundle of goods for extra profit. The idea is to retrospectively adjust the consideration in the original transaction so that the buyer can recoup its losses on the price difference.

Wang Yongliang
AllBright Law Firms

Businesses should pay particular attention to discounts given by suppliers, especially when it comes to international trade, as they may lead to customs or tax complications. If it proceeds only with the mindset of regular internal trade, the company may be unable to accomplish this type of sale. It also invites additional risk by raising red flags for regulators.

Supplier discount is not a commonly applied and accepted term in international trade. Its origin can be attributed to the second paragraph of article 1 of the circular of the National Tax Administration imposing a circulation tax on the partial income of commercial enterprises from suppliers, which provides that “remittances received by commercial enterprises from suppliers, if they are related to sales volume or amount (calculation based on proportion, amount or quantity), must be charged to the value added tax (VAT) in force upstream in accordance with the regulations in force without being subject to business tax.

To better illustrate the risks of supplier discounts in international trade, consider the following example.

An overseas parent company exports its goods to its domestic subsidiary at a CIF of 100 RMB, referring to the global pricing manual. The subsidiary, after clearing the shipment, resells the goods to unrelated domestic customers. One such customer with a particularly large purchase volume asks the subsidiary to sell the goods at a 90% discount. The subsidiary, pressed by the size of the client, reluctantly agrees. At the same time, the subsidiary asks the foreign parent company to compensate for its losses in the form of rebates paid quarterly.

Since supplier discounts in international trade involve compliance with customs and tax regulations, businesses need to know the rules on both fronts to make an informed judgment.

Customs risks

Is the taxable value affected? In the example above, the discount given by the domestic subsidiary to unrelated customers did not occur on import, but on domestic trade. Therefore, the customs value of the imported goods declared for customs was not affected, with no change in the amount of tax or loss incurred. Customs, satisfied with the payment of all taxes due, will not interfere in further internal trade.

Sense of discount. Depending on the nature of the supplier and recipient, there can be a world of difference between one discount and another. Although the example does not involve customs risks, with the foreign parent giving a discount to its domestic subsidiary, it may be otherwise if their roles were reversed. A rebate granted by the subsidiary to its parent company abroad may be considered an indirect payment or may be suspected of concealing the true price by dividing an outgoing payment in two. Therefore, customs may initiate an assessment to adjust the customs value.


The transaction in the example is markedly different from regular vendor discounts in domestic transactions. As the sale of the subsidiary to its unrelated customers falls under domestic trade, while the supply from the overseas parent company to the subsidiary falls under international trade, for import certification, the latter requires a payment slip of customs VAT instead of a special VAT invoice. However, these transactions should follow the same taxation rules as rebates granted by domestic suppliers. The subsidiary is therefore subject to substantial risks both in terms of corporation tax (EIT) and VAT.

For EIT, if the national subsidiary has made up the shortfalls in taxable income with allowances, it may defer the recognition of this income due to the quarterly settlement arrangement, thus running the risk of being fined for payment of taxable income. unpaid tax. By the time it makes the additional payment, the company may find that it has snowballed into a huge sum. In addition, if the subsidiary receives discounts by offsetting the value with 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 whether the discount is linked to the amount of sales or to other indicators. According to the relevant circular regulations, if the discount is in any way related to the amount or volume of sales, it should be treated as a supplier discount and deducted from VAT.

Wang Yongliang is a partner at AllBright Law Offices

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