A mild wave of surprise rippled through China's foreign business circles recently, when it was learned that the General Administration of Customs had taken a decision to extend again the 'grace period' during which some foreign investment enterprises (FIEs) have enjoyed an exemption from value added tax on capital equipment imports. This exemption is the last vestige of a pre-1995 policy aimed at providing preferential treatment to FIEs.
Under the policy, new FIEs, including equity and contractual joint ventures, could bring into China equipment or raw materials up to the level of their total investment without having to pay either customs duty or VAT. The policy met its demise through a notice issued by the State Council in December 1995. The notice stated that China would no longer grant duty and VAT exemptions to FIEs. Those established after April 1, 1996 are now required to pay both these charges at the nationally specified rate.
One hand giveth…
To mitigate the effects of these changes, the notice provided a grace period for FIEs approved and established prior to April 1,1996. For FIEs with total investment of US$30m or above, equipment or raw materials which form a part of their investment. can be imported into China VAT-and duty-free until December 31,1997. In the case of FIEs with total investment of less than US$30m, the tax-exempt period was set to last until December 31, 1996.
Provision was made so that FIEs could apply through the Ministry of Foreign Trade and Economic Cooperation for an extension of the grace period for any remaining equipment which was not brought into China by the specified dates. Such an extension, however, would require State Council approval ? a bureaucratic hurdle not easily surmounted. Without that approval, the VAT rates at the time would apply.
This arrangement was modified by Circular No. 1114 (1996) issued by the General Customs Administration in December 1996. The circular announced that the grace period for duty-free equipment imports would be extended by six months for those FIEs established between October 1, 1995 and March 31, 1996. For FIEs with total investment under US$30m, the grace period will be extended to June 30, 1997. FIEs with total investment greater or equal to that amount will enjoy an extended grace period until June 30, 1998.
…the other taketh away
The announcement of the extension is good news for those foreign investors which qualify for the reprieve ? but qualifying may itself be a sticking point for some firms. The terms of the grace period extensions will only apply to FIEs established in the six-month period before April 1, last year. Any enterprise established prior to October 1, 1995 will not qualify (nor will certain enterprises engaged in processing trade).
While the content of the new circular could mean that firms which had been granted business licences by the State Administration of Taxation prior to the deadline would still qualify for exemption, customs may take a narrower view. On a strict interpretation, only those businesses which had received approval from Moftec, been granted business licences from the SAIC and registered with customs ? all before March 31, 1996 ? would be eligible for a grace period extension.
In addition, those FIEs which cannot take delivery of their designated imports before the stipulated deadlines will face substantial hurdles. Although the circular does provide that such enterprises may file a special application for further extensions, such a request must be reviewed and approved by a battery of ministry and bureaux. These include the Ministry of Finance, Moftec, the State Council's Tax Survey Committee, the State Planning Commission, the State Economic and Trade Commission, the State Administration of Taxation and the General Customs Administration. Only after each of these departments has reviewed and issued an opinion on each application for further extension, may the State Council issue its approval. This is clearly a process most FIEs would be glad to avoid.
Customs blessing required
FIEs wishing to be included in the extended grace period must complete the requisite procedures at their local customs administration. In all cases, the approved scope of the tax exemption for which an enterprise is eligible will depend on the requirements set out in the Notice on the Issuing of the PRC Customs Administration, Foreign Investment Enterprises, Import and Export Goods Supervision and Tariff Exemption Procedures (1992). These regulations, which set out the goods for which equity joint ventures may receive exemptions from customs duties and the Consolidated Industrial and Commercial Tax (now VAT), should be referred to by all enterprises seeking extension.
All FIEs which qualified for inclusion under the terms of the original grace period should already possess a certificate, issued by the Customs Administration, to prove their status. After receiving approval to enjoy the new extension, all such enterprises must submit those certificates to the relevant customs office a second time. Customs will then affix a special seal to the Certificates to show that the FIE has received approval to enjoy the extension grace period. It is important to note that claims in regard of the new grace period which are made by FIEs without this seal will not be honoured.
Separately, a spokesman from the State Administration of Taxation said that the state tax rebate policy for imports would remain "basically unchanged" during 1997. Deputy Tax Minister Cheng Faguang also was reported in China Securities Daily as saying that the government will work to repay all outstanding tax rebates by the end of 1997, and that the Tax Administration plans to continue to improve and regulate its export tax rebate policy this year.
According to the government, in 1996 China handled Yn82.63bn (US$9.92bn) in export tax rebates, comprising 97 per cent of the planned returns. This figure represented the largest amount of tax rebates ever paid by China and was 50 per cent higher than the 1995 figure.
Freshfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further details, contact Matthew Cosans through its offices in Hong Kong, tel: (852) 2846 3400 or Beijing, tel: (861) 10 6465 4795.