China VAT Law 2026 Now in Effect—Cross-Border Sellers Face a 13% Tax Reality
The new China VAT Law 2026 took effect on January 1st. For U.S. ecommerce sellers operating through China-based manufacturing, inventory, fulfillment, or invoicing structures, the law tightens how VAT exposure is defined and enforced.
The update does not change VAT rates or introduce new tax categories. Its impact comes from clearer rules around taxpayer classification, sales thresholds, and documentation—areas that directly affect cost and compliance for sellers using China as part of their supply chain.
When China-Based Operations Create VAT Exposure
VAT applies when a seller’s activity is treated as a taxable transaction inside China. This commonly includes inventory stored in China, orders shipped from China, or sales routed through China-based entities or trading companies.
The law spells out these triggers more clearly than before. Once a transaction is considered domestic for tax purposes, VAT applies under standard rules. As a result, inventory location, fulfillment flow, and entity structure now carry more weight in determining tax exposure.
China VAT Law 2026 5 Million RMB Sales Threshold
The VAT Law sets 5 million RMB in annual taxable sales as the line between small-scale taxpayers and general taxpayers.
When sales exceed 5 million RMB, a business is automatically classified as a general taxpayer. Under the new law, there is no buffer period or delayed effective date. The change applies as soon as the threshold is crossed.
China VAT general taxpayers calculate fees under the standard method and are subject to statutory VAT rates, which can reach 13% depending on the goods or services involved. Small-scale taxpayers, by contrast, use simplified methods with lower effective rates.
VAT Rates: Simplified vs General Taxpayer
| Scenario | Small-Scale Taxpayer (Simplified Method | General Taxpayer (Standard Menthod |
|---|---|---|
| Applicable after annual sales | Up to 5 million RMB | Over 5 million RMB |
| VAT calculation | Flat levy on sales amount | Output VAT minus input VAT |
| Common VAT rate | 3% | 6% / 9% / 13% (depends on transaction) |
| Typical rate for goods | 3% | 13% |
| Typical rate for services | 3% | 6% |
| Input VAT deduction | Not available | Available with valid VAT invoices |
| Effective VAT cost (w/o invoices) | Predictable/low | High if deductions are unavailable |
| Margin sensitivity | Lower | Much Higher |
For example:
A seller operating through a China-based entity reports 4.9 million RMB in annual sales and uses a simplified VAT method. A few additional orders push total sales to 5.1 million RMB.
From that point forward, the seller is treated as a general taxpayer, higher VAT rates apply, and compliant VAT invoices become necessary to claim deductions.
VAT Invoices and Margin Impact
General taxpayers can deduct input VAT, but only when they hold valid VAT invoices.
This is where many U.S. sellers run into problems. Supply chains often involve factories or intermediaries that cannot issue compliant VAT invoices. When invoices are missing or incomplete, VAT deductions are not allowed, and the tax must be paid in full.
At higher VAT rates, the lack of deductions directly reduces margins. Under the new law, invoice quality and supplier compliance are central to managing VAT costs.
Revenue Timing and Enforcement Risk
The law also clarifies when VAT is owed. Tax liability is tied to when payment is received, claimed, or invoiced.
If revenue issues are later identified through audits or corrections, VAT is applied to the original period. This can result in back taxes and penalties, even if the issue is discovered much later.
For sellers with complex fulfillment or invoicing setups, accurate records and consistent reporting are now more important.
What U.S. Sellers Should Be Watching
For U.S. sellers using China-based supply chains, the VAT Law increases the cost of loose structures and incomplete documentation. The main pressure points are inventory location, invoicing, and sales volume.
In practice, that means keeping a close eye on:
- Where inventory is held
- Which entity issues invoices
- Whether suppliers can provide compliant VAT paperwork
- How close sales are to the 5 million RMB threshold
The VAT system itself has not materially changed. What has changed is clarity and enforcement. For sellers tied into China, VAT is now a structural issue that requires ongoing attention.
