Changes in PRC Import Taxation Policy

The most significant policy change targets imports of equipment used to manufacture products intended exclusively for export. Foreign-invested projects listed in permitted categories under the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) that directly export all of their products (all-for-export projects) will now be invariably subject to customs duties and an import stage value-added tax (VAT) on any imported equipment.

After payment of taxes on imported equipment, all-for-export projects will be eligible for rebates of their paid import taxes. The rebates will be issued at a rate of 20% per year over a period of five years. Such refunds, however, will only be issued if the projects comply with their export commitments. Projects that fail to meet their export commitments are required to repay the rebated taxes to the government and will be subject to additional penalties.

Under the new regulation, all-for-export projects that have already been approved will retain their tax-exempt status. However, if these projects require imports of equipment after the new policy comes into effect, their compliance with exporting requirements will also be subject to verification for a five year period starting from the date of commencement of production. Overall, the new policy means that all-for-export projects, whether new or previously approved, will now be subject to strict verification of their compliance with export commitments.

Projects Approved Prior to April 1996

Under the new regulation, some types of projects approved before April 1 1996 may import equipment exempt from customs duties and import-stage VAT. Projects in the following categories are eligible for exemption: (i) foreign investment projects; (ii) projects funded with loans from foreign governments or international financial organizations that are subject to foreign investment policies; (iii) infrastructure projects (including large-scale construction); and (iv) technical renovation projects. To qualify for the exemption, the equipment must be imported for use by the project itself (i.e., it may not be resold to other parties in China) within its total investment budget. The exemption, however, does not apply to an extensive list of equipment contained in the General Administration of Customs, Import Commodities Not Exempt from Duty and Tax for Foreign Investment Projects Catalogue (Trial Implementation) and the General Administration of Customs, Import Commodities Not Exempt from Duty and Tax for Domestic Investment Projects Catalogue.

In other words, the projects listed above will now be eligible for preferential tax treatment for equipment imports introduced in 1997 under the State Council, The Adjustment of Tax Policies on Imported Equipment Circular (Notice No. 37). However, the import duty exemptions under Notice No. 37 already apply to the majority of the projects outlined above, such as: (i) projects funded with loans from foreign governments or international financial organizations; (ii) technical renovation projects; and (iii) foreign investment projects approved after October 1 1995.

No Other Import Duty Exemptions Permissible

The point that should concern foreign investors the most is the announcement in Notice No. 146 that, once the new policy comes into effect, the PRC authorities will generally not accept or approve any applications for exemption or reduction of import taxes for individual projects. The new regulation also reiterates the existing policy that raw materials are not exempt from import duties.

Although not stated explicitly in Notice No. 146, the blanket ban on new exemptions for individual projects will not apply to projects that already enjoy exemption from import duties. The list of such import tax-exempt projects was most recently confirmed in the General Administration of Customs, Questions Relevant to the Implementation of the Circular dated April 4 2002 (Notice No. 81). Specifically, projects in the gencouragedh category under the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录)that involve technology transfer and satisfy certain qualification criteria would be exempt from payment of customs duties and import-stage VAT. In addition, other projects previously exempt from import taxes would continue to enjoy preferential treatment. For instance, projects qualified for exemptions that were listed in the gencouragedh and grestricted Bh categories in the 1997 version of the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) (i.e., prior to its revision in March 2002) would still retain previously enjoyed exemptions.

Foreign investors should note the announcement in the new regulation that the approval of the State Council is required for exemption or reduction of import duties in projects not previously exempt from import duties. This implies that, despite the trend towards strict control of import tax exemptions, individual projects can still obtain the exemptions with the State Councilfs blessing.

By Asel Umurzakova
Freshfields Bruckhaus Deringer,
Hong Kong