Investors should revisit operations to prepare for tax policy shifts
July 15, 2010 | BY
clpstaff &clp articles &Export tax rebate reductions for high-pollution manufacturers
Foreign investors in certain industries should reassess their manufacturing operations and supply chains to be adequately prepared for policy changes and to save on taxes, say counsel.
The advice comes after it was announced that China's Ministry of Commerce (MOC) would decrease certain industries' export tax rebates. In particular, the government is targeting those manufacturing sectors that have a high pollution rate, are damaging to the environment, and heavily resources-reliant. These include the steel, paper, textile and apparel manufacturing industries.
The industries that are expected to benefit from the rate adjustments are high technology, information technology, bio-technology and others that contribute to the government's central policies of saving energy and developing a technological edge.
Eugene Lim, a PRC tax and customs specialist at Baker & McKenzie in Hong Kong said investors could be better prepared for policy shifts if they kept up-to-date on whether or not their manufacturing operations have been optimised from a value-added tax (VAT) perspective.
“Often a change in the manufacturing arrangement, such as from turn-key to roll or vice versa could result in significant reductions in unrecoverable VAT costs.”
Investors are also suggested to look at other ways to reduce the inefficiencies in their supply chains such as through using free trade agreements (FTAs) and VAT minimisation strategies.
Although the MOC did not indicate when the new export VAT refund rates (EVRRs) would come into effect or what the specific rate cuts would be, its adjustment of EVRRs is meant to calibrate China's trade and economic policy. Lim called the move “a brilliant master stroke by the Chinese authorities.”
In 2008, the government made a similar adjustment to the EVRRs in an effort to promote high-technology, high value-added and environmentally-friendly export-oriented production. The discouraged industries began to exit the China market because the cost of production increased with the decreased export tax rebate.
In addition to re-emphasising the objectives of the 2008 changes, the 2010 adjustments aim to “prevent the export of goods that are critical to national security, such as key primary resources,” noted Lim.
He added: “Despite the effectiveness as a trade policy tool, China needs to do a better job at preparing investors for the rate adjustments.” The 2008 adjustments came suddenly, catching multinationals off guard and leaving foreign investors wary.
“This can be overcome through better communication and grandfathering periods for the existing rates,” he said.
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