Understanding the Proforma Invoices in China
Proforma invoice is a commonly used preliminary quotation document in international trade in China.
It provides the buyer with detailed information about the products or services, including price, quantity, specifications, payment terms, and delivery conditions.
A proforma invoice is not a formal commercial invoice, thus it does not have legal validity and is not used for calculating and paying value-added tax (VAT).
This article will introduce the main uses, different types, usage specifications and precautions of proforma invoices.
Table of Contents
What is a Proforma Invoice from China?
A proforma invoice is a widely used informal document in international trade, typically sent by the seller to the buyer before a commercial transaction takes place.
It serves as a quotation, listing details such as product prices, quantities, shipping methods, payment terms, and estimated shipping dates.
Although it is not a formal invoice, a proforma invoice acts as a foundation for the negotiation and discussion between buyer and seller, setting expectations on transaction terms before the actual invoice is issued.
Proforma invoices play an essential role in China’s import and export processes, especially in initial stages, as they help buyers estimate product costs, logistics, and other potential expenses.
While not a binding financial document, the proforma invoice in international trade serves as a preliminary contract or agreement to clarify mutual expectations and obligations between the trading parties.
Main Uses of a China Proforma Invoice
- Quotation and Contract Confirmation: It allows sellers to present quotes to buyers and outline preliminary agreement on order terms. Buyers can review the invoice to ensure price and terms meet their requirements.
- Financing and Payment Preparation: Buyers may use the proforma invoice to apply for loans or issue payment requests (such as letters of credit) through banks. Banks often assess these invoices to gauge buyers’ financing needs.
- Customs and Logistics Preparation: Though not an official customs document, a proforma invoice provides essential product and pricing information, allowing buyers to prepare logistics and customs clearance plans.
Are Proforma Invoices Illegal?
A proforma invoice is a legal document, but it differs significantly from a commercial invoice.
A commercial invoice serves as an official request for payment and carries legal binding, whereas a proforma invoice is primarily for reference and agreement between buyer and seller.
Proforma invoices are issued in good faith and provide a preliminary outline of a transaction, including details such as pricing, product descriptions, shipping, and payment terms.
Why Proforma Invoices Are Legal
- Informational Purpose: Since proforma invoices are not intended for final billing, they hold no formal financial or tax liability. This removes them from the realm of legally binding invoices, allowing them to function as offers rather than requests for payment.
- Quotation Use: They allow buyers to review terms and verify expectations before finalizing an order. Because no goods are yet delivered or payment received, a proforma invoice provides safe groundwork for an agreement.
- No Tax or Payment Demand: Unlike commercial invoices, proforma invoices do not include tax amounts, making them exempt from financial regulatory requirements. This exemption maintains their legality while differentiating them from more formal invoicing documents.
While a proforma invoice does not carry legal standing for financial transactions, it can serve as evidence in cases of dispute if it reflects an agreed-upon understanding.
As long as the proforma invoice is used appropriately and honestly, it remains legal and valid for its intended purpose.
Different Types of Invoices in China:
China uses various types of invoices to fulfill different business and tax-related requirements. Here are the common types:
1. Proforma Invoice
- Purpose: Used for quotations and initial order confirmation.
- Features: Informal and non-binding; provides basic transaction information.
- Application: Used during initial negotiation or order confirmation stages.
2. Commercial Invoice
- Purpose: Used for export declarations and formal payments.
- Features: A formal document that records sales details, including product details, pricing, and payment terms; serves as an official financial record for both parties.
- Application: Issued upon shipping, submitted to the buyer, banks, and customs for clearance and duty calculation.
3. VAT Invoice
- Purpose: Used for tax reporting and deductions in domestic transactions.
- Features: An official invoice approved by Chinese tax authorities, enabling businesses to deduct VAT.
- Application: Commonly used in domestic transactions, especially in B2B transactions involving tax deductions.
4. Packing List
- Purpose: Provides packaging details of goods.
- Features: Used along with commercial invoices; lists product contents, quantities, packaging dimensions, but no pricing information.
- Application: Essential for customs clearance and logistics, helping authorities verify shipment details.
5. Tax Invoice
- Purpose: Used to record and pay taxes.
- Features: Primarily used outside of international trade for tax processing, such as in cross-border e-commerce.
- Application: Used in specific tax reporting needs to ensure compliance with tax regulations.
Difference Between Proforma and Commercial Invoices
While proforma and commercial invoices may appear similar, they differ significantly in purpose and legal standing:
Feature |
Proforma Invoice |
Commercial Invoice |
|---|---|---|
Purpose |
Quotation and preliminary order confirmation | Formal sales document, recording finalized transaction |
Legal Standing |
Non-binding, for reference or basis of contract | Legally binding, used for payment and financial records |
Tax Information |
Usually excludes tax details | Includes tax information, necessary for customs and tax processing |
Usage Stage |
Initial negotiation or order confirmation phase | Issued after transaction confirmation, upon shipment |
Information Detail |
Basic information, mainly for preliminary quotation | Detailed information, covering products, taxes, shipping, etc. |
How can I obtain a proforma invoice?
Obtaining a proforma invoice is usually a straightforward step in the procurement and trading process.
Here are the general steps to acquire a proforma invoice:
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Contact the Supplier and Request:
When a buyer identifies the products or services needed in international trade, they can directly contact the supplier to express the intention to obtain a proforma invoice.
Suppliers typically provide an initial quote based on the buyer’s requirements.
Buyers can reach out via email or phone, specifying the needed products, quantities, delivery location, and shipping method so that the supplier can generate the proforma invoice accordingly.
-
Clarify Transaction Details:
When making the request for a proforma invoice, it is best to provide detailed terms and requirements of the transaction, including quantities, specifications, quality standards, payment methods, and delivery terms (such as FOB, CIF, etc.).
This ensures that the proforma invoice contains sufficient information to facilitate further negotiations, banking arrangements, or logistics planning.
- Confirm Invoice Information:
Once the proforma invoice is received, the buyer needs to carefully review its contents to ensure that the prices, quantities, shipping methods, and other terms are accurate.
Although a proforma invoice is not a legal document, it serves as a preliminary agreement on the transaction, ensuring that both parties are aligned on the terms.
The process of obtaining a proforma invoice is relatively simple and is typically provided quickly after both parties agree on the basic transaction terms.
A proforma invoice does not involve taxes and serves as a reference for quotes, financing, and initial shipping documents.
What if the proforma invoice does not include the cost of the entire proposal?
Assuming that your shipping documents or proforma invoice cover only one-third of the total project cost, leaving two-thirds uninvoiced, here are several ways to handle the remaining costs:
1. Issue Separate Invoices
Consider dividing the total project cost into different phases and issuing separate invoices for each phase or deliverable.
In this case, the initial invoice (proforma invoice) can cover the one-third shipping cost, while the remaining two-thirds can be billed in subsequent stages using a complete commercial invoice.
2. Match Contracts and Invoices
Clearly outline the entire project cost in the contract, specifying the phased billing arrangement.
This allows clients and regulatory bodies to verify the total cost by comparing the project contract with the shipping documents and invoices.
3. Engage an Import-Export Agent
If Chinese invoice approval policies are strict, you can also work with an import-export agency.
They can help issue invoices in line with the different stages of actual shipments.
4. Provide Supporting Documentation
Prepare a supplementary document detailing the total project cost and the phased billing arrangement.
This document can assist in the approval process by clarifying the unbilled two-thirds portion.
By using separate invoices or phased billing, you can ensure that the project’s total cost is accurately accounted for while complying with Chinese regulatory requirements.
Chinese Proforma Invoice – Model Document
Today, many online platforms proforma invoice processing. Additionally, by using a simple internet search, you can find numerous examples of Chinese invoices.
To explore these, just search for “proforma invoice sample” in any search engine.
Below is a simple Chinese proforma invoice template：
Rules and Standards of Proforma Invoice
As a non-binding document, the proforma invoice primarily serves as a basis for understanding between buyer and seller.
Here are essential rules to consider when using a proforma invoice:
- Detailed and Transparent Information: A proforma invoice should contain product descriptions, unit price, total amount, quantity, delivery terms (such as FOB, CIF), and payment terms to minimize misunderstandings and disputes.
- Clear Delivery Terms: Delivery terms (such as Incoterms like FOB, CIF, EXW) are crucial in international trade as they define responsibilities and cost sharing in shipping. Clear terms in the invoice help both parties understand their obligations.
- Currency and Exchange Rate Specification: Choosing the right currency is essential in international transactions. A proforma invoice typically uses USD or other major currencies and specifies exchange rates to protect against currency fluctuations.
- Signatures and Stamps: Although not legally binding, having both parties sign or stamp the proforma invoice can enhance credibility, particularly in new business relationships.
- Clear Payment Terms: Common payment terms include advance payments, letters of credit (L/C), or cash on delivery. The proforma invoice should detail payment schedules and conditions to help buyers arrange finances accordingly.
- Accurate Shipment Information: Estimated shipping dates and arrival times should be noted on the proforma invoice so the buyer can prepare for receipt and storage, especially for time-sensitive goods.
- Legal Limitations of Proforma Invoices: While not legally binding, the proforma invoice can serve as partial evidence in case of disputes to reflect transactional intent and details. Thus, accuracy and consistency in drafting the invoice are crucial to avoid issues later.
What Can I Do Based on a Proforma Invoice?
Can I Use a Proforma Invoice for Export?
Yes, proforma invoices are commonly used in the export process, particularly at the early stages of international transactions.
They offer essential information to buyers, banks, and customs authorities.
Here’s how they apply to exports:
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Pricing and Contract Agreement:
A proforma invoice helps establish agreement on price, terms, and other details before the transaction begins.
In export processes, this is critical for establishing trust and clarity, especially in cases where buyers are unfamiliar with the seller.
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Banking Requirements:
Many international transactions require a proforma invoice when securing financing or payment methods like letters of credit.
Banks often require proforma invoices to determine the exact amount to be financed or the letter of credit amount.
For example, if a buyer needs to open a letter of credit to pay for an international order, the bank will use the proforma invoice to assess the financial obligation accurately.
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Assisting in Shipping Preparation:
Exporters use proforma invoices to prepare documentation for shipping.
For instance, a freight forwarder or logistics partner may request a proforma invoice to prepare export documentation, arrange cargo space, and handle shipping logistics.
However, while proforma invoices are essential for establishing export terms, they should not be mistaken for commercial invoices.
A commercial invoice is required at the end of the export process to finalize the transaction and complete customs clearance.
Can I Use a Proforma Invoice as a Deposit?
No, you should not use a proforma invoice to make a deposit or any payment. Instead, you should issue a complete invoice when accepting any form of payment.
A proforma invoice will not appear in your accounting records, so any payments made to your business should be documented with a complete invoice that reflects in your reports.
A full invoice is considered a legal document, which means that clients are required to pay the owed amount by the due date. If no due date is specified, payment must be made within 30 days.
On the other hand, a proforma invoice does not carry the same legal significance as a full invoice.
Therefore, if you want to receive payments without encountering extra hassles during tax season, it would be beneficial to issue a full invoice when payments are due.
Can I Pay VAT Based on a Proforma Invoice?
No, a proforma invoice cannot be used for VAT payment. Only commercial invoices hold formal financial and tax validity in the context of VAT.
Here are the specific reasons:
-
Proforma invoices lack legal binding:
A proforma invoice is a preliminary document that provides a quote and transaction information but does not serve as a formal financial document.
VAT obligations arise from actual transactions documented in commercial invoices, so payments can only be based on formal invoices that confirm payment obligations.
-
Absence of formal tax details:
Proforma invoices typically do not include VAT amounts and do not outline formal payment dates and conditions.
Tax authorities usually require formal VAT invoices (like commercial invoices) to assess transactions and determine VAT amounts.
Therefore, paying VAT based on a proforma invoice is neither legal nor recognized by tax authorities.
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Need for tax deductions:
Businesses often require VAT deductions during procurement to reduce their VAT burden.
However, proforma invoices lack the capability for tax deductions in financial and tax systems, as tax agencies generally only accept commercial invoices as proof for deductions.
In summary, proforma invoices are only used as reference documents and cannot be utilized for calculating or paying VAT.
Only official commercial invoices can meet VAT payment and deduction requirements.
China Proforma Invoice Conclusion:
The proforma invoice plays a vital role in both Chinese and international trade, acting as a tool for communication and order confirmation between trading parties.
While it lacks legal standing, it is essential in outlining transaction details and facilitating subsequent logistics arrangements.
China’s invoicing system includes several types of invoices, each designed for specific tax and business purposes.
From proforma invoices to commercial invoices and VAT invoices, these documents together form the foundation of China’s trade and tax systems.
Familiarizing with these types and their rules allows both buyers and sellers to mitigate risks and ensure smooth international trade operations.
We hope this article helps clarify proforma invoices and other types of invoices for your international trade activities.
