On September 14, five ministries of the Chinese Government, namely the
Ministry of Finance, the National Development and Reform Committee, the Ministry
of Commerce, the State Administration of Customs and the State Administration of
Taxation, jointly issued a circular, "Concerning the Adjustment of the Export
Refund Rate for Certain Commodities and Expansion of the Prohibited Commodity
Catalogue for Processing Trading" (Caishui 2006, No. 139, abbreviated as "the
Circular" hereafter).
In the Circular, the export refund rates for a number of export commodities
have been adjusted. In addition, the prohibited commodity catalogue for
processing trade has been expanded and supplemented. It is the biggest
structural adjustment of the export refund rate since 2004, reflecting that
export tax refund policy continues to be an important instrument used by the
Chinese Government to adjust industries' structures policies.
Main content
Adjustment of the export refund rate of certain export commodities
t Cancellation of export tax refund for 255 Customs codes
These changes mainly affect non-metallic mineral products, coal, natural gas,
coloured metals, scrap materials, etc, most of which previously enjoyed a refund
rate of between 11 per cent and 13 per cent.
t Reduction in the export refund rate for 1,130 Customs codes with the change
in rates ranging from 2 per cent to 8 per cent.
These changes mainly affect steel (142 codes), cement, glass and
part-metallic materials, textile products, furnishings and plastics.
t Increase in the export refund rate of 191 Customs is in line with the
change in rates ranging from 2 per cent to 8 per cent.
These changes mainly affect specific technological equipment, IT products,
biological and medical products, high-tech products encouraged by the national
industrial policies, as well as products using agricultural materials as input.
The above changes take effect from September 15, 2006, and the dates shown on
the "Customs Export Declaration Forms" for export tax refund will be used as
reference.
For export contracts signed on or before September 14, 2006, if they can be
filled for record before the prescribed date (i.e. before September 30, 2006)
and the exports are made before December 14, 2006 (inclusive), the business can
claim refund from the authorities using the old export refund rates. Businesses
that fail to file the export contracts before the prescribed date or fail to
declare the export before December 15, must apply the new export refund rate.
A number of administrative issues and requirements in the filing of export
contracts have been clarified separately in the "The circular of State
Administration of Taxation concerning the relevant issues in the filing of
export contract" (Guoshuihan 2006, No.847)
Adjustment of the Prohibited Commodity Catalogue for Processing Trading.
In accordance with the requirements that the Customs adopt in the management
of processing trade, the commodities which are listed in Prohibited Commodity
Catalogue are not permitted to employ the processing trade model. As such, they
may not benefit from the favourable policies for processing trade. Effective
from September 15, 2006, all commodities which are not entitled to export
refunds shall be added to the Prohibited Commodity Catalogue for Processing
Trading. For the import of such products listed in the Prohibited Commodity
Catalogue, import duty and import taxes shall be levied. The above shall also be
implemented in designated zones such as the Export Processing Zones and Bonded
Zones which are under the special supervision of the Customs.
Impact of refund adjustment
In general, most of the adjustments in the Circular refer to the decrease in
export refund rates. As such, many businesses may suffer a significant increase
in export costs.
The biggest challenge for businesses will now be to find the most efficient
export commercial model in order to minimize the negative impact on the export
cost due to these changes. Businesses should now assess the impact of the export
refund rate adjustments on their current business operations and consider
whether it is possible to identify any potential improvements on these.
Businesses do have the option of trying to take advantage of the concession
provided from September 14 to December 14. In order to lower the cost when
exporting, businesses may apply to use the new export tax refund rates for
commodities where the refund rates have increased under the Circular. For the
commodities where the refund rates have decreased or have been cancelled
altogether, businesses may adopt the new export refund rates from December 15
provided they can meet the associated administrative requirements. According to
Guoshuihan [2006] No.847, the option is only applicable for the export of
commodities that apply for use of the original tax refund rates. It is suggested
that businesses confirm the practice with the tax bureau-in-charge before
September 30.
It is indicated in the Circular that all commodities which are not entitled
to export refunds shall be added to the Prohibited Commodity Catalogue for
Processing Trading. In addition customs duties and other taxes in relation to
the import will be levied when importing the above-mentioned commodities. As
such businesses that are involved in processing trade may face new problems such
as a potential increase in the tax cost for importing commodities and also other
goods. It is recommended that businesses review the position under their current
processing trade models to assess if there are any potential tax efficiency
improvement opportunities.
