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25 October, 2006 China Expands Scope of Prohibited Category under Export Processing Trade |
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1. Latest Change in Processing Trade Policy
On 14 September 2006, the Ministry of Finance, National Development and Reform Commission, Ministry of Commerce, General Administration of Customs, and State Administration of Taxation jointly issued a circular on adjustments made to tax rebate rates for certain exports and on the expansion of the prohibited category under export processing trade (Circular No.139). According to this circular, all the 138 products for which export tax rebates were abolished earlier and the 258 products for which export tax rebates have been removed this time now come under the prohibited category.
Starting from 15 September 2006, the import of all products newly added to the prohibited category under processing trade is subject to import tariffs and import-related taxes.
For processing trade contracts which have been approved by the commerce departments and filed with Customs before this date, they are allowed to be executed within the validity period according to the original import bonded policy. Upon expiry of the validity period, if the goods are still not re-exported, no extension will be granted and the regulations on domestic sale of processing trade goods will apply.
The new regulations on products under the prohibited category in processing trade also apply to Customs-supervised zones such as export processing zones and bonded areas. At present, Customs have already stopped filing export processing trade contracts under this category.
2. Implications for Hong Kong Companies
The latest regulations on products under the prohibited category apply to all enterprises, including category A enterprises with good compliance track record and considerable export volume. Moreover, the expansion of the prohibited category this time covers a wide scope and involves goods under nearly 400 tariff numbers, affecting such industries as food, papermaking, packaging, leather, metals and batteries. As a result, quite a large number of Hong Kong companies are affected.
Under the new policy, the production cost of those Hong Kong companies which are directly affected will rise as they are required to pay tariffs and import-related taxes. Meanwhile, downstream processing trade enterprises will also find it more difficult and expensive to source goods such as paper packaging and electroplated products on the mainland. It is understood that some of the affected industries have already stopped taking orders and buying raw materials.
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China's Policy for the Administration of Processing Trade For a long time, processing trade in the mainland had developed in a loose manner and had been left to operate arbitrarily, making it difficult for Customs to exercise its supervisory role. Under such circumstances, some companies made use of processing trade to engage in illegal activities such as smuggling. In a move to maintain the normal order of processing trade, prevent and crack down on processing trade-related illegal activities such as smuggling, tax evasion and foreign exchange evasion, the former State Economic and Trade Commission, former Ministry of Foreign Trade and Economic Cooperation, General Administration of Customs, Ministry of Finance, State Administration of Taxation, People's Bank of China and State Administration of Foreign Exchange jointly issued the Opinion on Further Improving the Customs Duty Deposit System for Export Processing Trade (Circular No.35) in March 1999. This circular aimed at strengthening the management of processing trade at two levels. First, goods under processing trade are managed by category whereby materials and parts imported for processing are classified into prohibited, restricted and permitted categories. Goods under the prohibited category may only be imported and exported in the form of general trade. In other words, all import-related taxes (tariffs and VAT) must be paid in full at the time of import. For goods under the restricted category, "actual payment" of customs duty deposit is required unless the enterprise concerned is a category A enterprise. What this means is that all processing trade enterprises must open a customs duty deposit account at a designated bank and pay into this account a deposit equivalent in amount to the import-related taxes before importing the necessary materials and parts for processing. The deposit will be refunded upon verification and cancellation after the goods are processed and re-exported. Second, processing trade enterprises are also managed by category whereby enterprises are classified into A, B, C and D categories based on their annual processing performance and compliance with state laws. Category A enterprises are not subject to the customs duty deposit system, i.e. they may import materials and parts for processing without paying import-related taxes. For category B enterprises, except for goods under the restricted category which require customs duty deposit payment, they are subject to "nominal payment" of customs duty deposit. In other words, they have to open a customs duty deposit account for imports but do not have to actually pay the deposit. As for categories C and D enterprises, actual payment of customs duty deposits is required. |
3. Possibility of Further Policy Change
On the whole, the latest policy change mainly affects high pollution, high energy consumption and resource consumption industries as well as low value-added industries which can easily trigger international trade disputes. The move suggests that the Chinese government is hoping to upgrade its industrial structure and protect the environment by adjusting its processing trade policy.
It is reported that, based on the principle of the present round of adjustment, the Chinese government is considering expanding also the scope of the restricted category under processing trade. While the expansion of the restricted category will not directly affect category A enterprises, category B enterprises will be required to make actual payment of customs duty deposit when importing goods under the restricted category, which will in turn tighten their cash flow. In this connection, Hong Kong companies should follow closely the new measures expected to come out in November further revising the export processing trade policy.
Appendix
List of Products Added to the Prohibited Category under
Processing Trade According to Circular No.139
(1) Products for which export tax rebate was removed on 15.9.2006
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Serial No. |
Tariff No. |
Description of Goods |
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1 |
12119035 |
Sweet wormwood herb Artemisia apiacea |
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2 |
21039010 |
Gourmet powder |
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3 |
22011010 |
Mineral water (not containing added sugar or other sweetening matter or flavour) |
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4 |
22019090 |
Other water, ice and snow |
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5 |
22071000 |
Undenatured ethyl alcohol of an alcoholic strength by volume of 80% or higher |
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6 |
22072000 |
Ethyl alcohol and other spirits, denatured, of any strength |
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7 |
25020000 |
Unroasted iron pyrites |
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8 |
25030000 |
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9 |
25051000 |
Silica sands and quartz sands, whether or not coloured |
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10 |
25059000 |
Other natural sands, whether or not coloured |
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11 |
25061000 |
Quartz |
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12 |
25062100 |
Quartzite, crude or roughly trimmed |
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13 |
25062900 |
Quartzite, cut into blocks or slabs |
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14 |
25070010 |
Kaolin, whether or not calcined |
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15 |
25070090 |
Other kaolinic clays, whether or not calcined |
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16 |
25090000 |
Chalk |
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17 |
25111000 |
Natural barium sulphate (barytes) |
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18 |
25112000 |
Natural barium carbonate (witherite), whether or not calcined |
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19 |
25120010 |
Kieselguhr, tripolite and diatomite |
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20 |
25120090 |
Other siliceous fossil meals and similar siliceous earths |
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21 |
25131100 |
Pumice stone (crude or in irregular pieces) |
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22 |
25131900 |
Other pumice stone |
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23 |
25132000 |
Emery, natural corundum, natural garnet and other natural abrasives |
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24 |
25140000 |
Slate, whether or not roughly trimmed or merely cut into blocks or slabs or merely cut, by sawing or otherwise, into blocks of a rectangular (including square) shape |
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25 |
25151100 |
Marble and travertine, crude or roughly trimmed |
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26 |
25151200 |
Marble and travertine, rectangular shape |
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27 |
25152000 |
Ecaussine and other calcareous monumental or building stone, whether or not roughly trimmed or merely cut, by sawing or otherwise, into blocks or slabs of a rectangular (including square) shape |
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28 |
25161100 |
Granite, crude or roughly trimmed |
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29 |
25161200 |
Granite, rectangular or square shape |
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30 |
25162100 |
Sandstone, crude or roughly trimmed |
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31 |
25162200 |
Sandstone, rectangular or square shape |
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32 |
25169000 |
Other monumental or building stone, whether or not roughly trimmed or merely cut, by sawing or otherwise, into blocks or slabs of a rectangular (including square) shape |
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33 |
25171000 |
Pebbles, gravel, broken or crushed stone, of a kind commonly used for concrete aggregates, for road metalling or for railway or other ballast, shingle and flint, whether or not heat-treated |
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34 |
25172000 |
Macadam of slag, dross or similar industrial waste |
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35 |
25173000 |
Tarred macadam |
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36 |
25174100 |
Marble macadam, granules, chippings and powder, whether or not heat-treated |
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37 |
25174900 |
Macadam, granules, chippings and powder, of stones of headings 2515 and 2516 (except marble), whether or not heat-treated |
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38 |
25181000 |
Dolomite, whether or not calcined or sintered, including dolomite roughly trimmed or merely cut, by sawing or otherwise, into blocks or slabs of a rectangular (including square) shape |
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39 |
25182000 |
Calcined or sintered dolomite, whether or not roughly trimmed or merely cut, by sawing or otherwise, into blocks or slabs of a rectangular (including square) shape |
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40 |
25183000 |
Dolomite ramming mix |
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41 |
25191000 |
Natural magnesium carbonate (magnesite) |
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42 |
25199091 |
Magnesium oxide, chemically pure |
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43 |
2519909990 |
Other magnesium oxide |
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44 |
25201000 |
Gypsum; anhydrite |
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45 |
25202010 |
Plasters for dental use, whether or not coloured, with or without small quantities of accelerators or retarders |
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46 |
25202090 |
Other plasters, whether or not coloured, with or without small quantities of accelerators or retarders |
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47 |
25210000 |
Limestone flux; limestone and other calcareous stone, of a kind used for the manufacture of lime or cement |
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48 |
25221000 |
Quicklime |
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49 |