Recent relaxations in China's logistics sector make it possible for foreign investors to increase their participation
in a range of different activities.
China has become a production power-house over
the past 20 years and is now one of the world's largest trading nations. In the first five
months of 2003, total exports and imports climbed nearly 40 per cent year-on-year to reach
US$65.4bn.
But while demand for quality and integrated transportation and logistics
service providers is strong, these sectors are still dominated by domestic firms whose
management concepts remain in their infancy. As China liberalises its trading and distribution sectors over the next three to five years as part of its WTO commitment, restrictions on foreign ownership will he relaxed.
Most logistics functions in China are
currently handled by enterprises in-house. In future, more of these functions will be out-
sourced to third-party service providers as companies strive to achieve cost savings.
Meanwhile, major domestic logistics companies are seeking tie-ups with
foreign investors to enhance their international capa-bilities, while medium-sized operators
want to grow by attracting capital to exploit the licenees they possess.
New regulations
In July 2002, new regulations on foreign investment in the logistics sector
became effective. They permit foreign investors to form equity and contractual joint ventures
with a maximum foreign ownership of 50 per cent to engage in the following
activities:
- providing import export and related ser-vices, including import export
of goods on their own account or as an agent: - acting as an agent for import and
export business for export processing enterprises; - providing international freight
forwarding services for imported and exported goods by sea, air or land; -
transporting, warehousing, loading and unloading, processing, packaging, delivery and
relevant information processing and consulting services of ordinary goods by road; - domestic freight forwarding of goods by land;
- using computer networks for
management and operations of logistics business.
The minimum registered
capital for the creation of logistics enterprises is US$5m
and they can only be set up in
one of the trial areas: the municipalities of Beijing, Tianjin, Shanghai and Chongqing;
Zhejiang, Jiangsu and Guangdong provinces; and Shenzhen special economic
zone.
Freight forwarding
The Ministry of Foreign Trade and Econom-Ic Co-
operation (Moftec), now incorporated into the new Ministry of Commerce, issued new
reguTations Tast December that increased the maximum foreign ownership in freight
forwarding from 49 per cent to 75 per cent. The minimum registered capital for a new
foreign-invested international freight forwarding agency is US$lm and it requires at least
five personnel who have been engaged in international forwarding agency business for at
least three years or with appropriate qualification certificates. Such an enterprise may
engage in the following activities:
- booking (leasing of ships, and chartering of
airplanes and shipping space), consign-ment, warehouse storage and packing; -
supervising loading and unloading. con-tainer grouping and unpacking, allocating goods,
providing transit and related short-distance transport services; - arranging customs
declarations, customs examination and inspection, and insurance; - filling out the
relevant documents, pay-ment of transportation of transit cargoes; - agency business
of international exhibits, personal items and transportation of transit cargoes; -
arranging international multi-modal trans-portation and container transport (including the
packing of containers); - international express delivery (excluding personal mail and
postal services for official documents of provincial or higher branches of the party,
government or military); and - consultaney and other international for-warding agency
business.
In November 2002, the Ministry of Com-munication and Moftec jointly
issued a new regulation to increase the maximum foreign ownership level of a Sino-foreign
road trans-portationjoint venture to 75 per cent from 40 per cent. Since then, foreign
investors have been permitted to engage in: road passenger transportation in the form of
equity joint ven-tures; or road cargo transportation, freight forwarding and unloading,
warehousing and some other joint venture auxiliary services.
Despite these recent
relaxations, foreign investors are still faced with several hurdles. While the Ministry of
Commerce is the main approval authority to drive the above regula-tions, fully-fledged
logistics, freight forward-ing and transportation companies need to obtain various
approvals licenees from other supervisory authorities, including the Min-istry of
Communications, Civil Aviation Administration of China, the China State Post Bureau,
Customs and local authorities. A lack of co-ordination. inflexibility and local protectionism
among these authorities exacerbates the problem for foreign investors. Furthermore, the
relevant regula-tions and requirements of various authorities are not very
transparent.
Though foreign investors are allowed to own a majority stake in road
transportation and international freight forwarding enter-prises, they may still be reluctant to
form joint ventures with Chinese partners because of concerns about handing over
technical and management expertise to potential future competitors. They may also find it
difficult to acquire the remaining shares from the Chi-nese partners once the regulations
allow 100 per cent foreign ownership. One possible solution would be to include a clause
to allow foreign investors to buy out the remaining shares of the joint ventures, hut such a
clause might not be enforceable in every instance.
Tax issues
Under the domestic
Enterprise Income Tax (FIT) Law, newly established domestic transportation enterprises
are entitled to a one-year exemption and one-year 50 per cent reduction in FIT, from the
start of operations. For domestic enterprises, the normal EIT rate at 33 per cent would
apply.
More preferential tax treatment could he available to domestic enterprises that are
converted to foreign-investment enterprise' (FITs). According to foreign EIT law, FITs
engaged in communication and non-passen-ger transportation would he qualified as 'pro-
duction enterprises'. FITs that own their own transportation vehicles and warehouse facili-
ties to provide direct services to customers would also be qualified as production enter-
prises. They can enjoy the following prefer-ential income tax treatments:
state income tax of 15 per cent or 24 per cent in designated zones (versus the normal rate
of 30 per cent);
reduction, starting from the first profit-making year.
Enterprises engaged in express
delivery are specifically excluded from these preferential policies. It is also important to note
that preferential tax treatments arc not automatic, so foreign investors should apply to the
tax authorities to secure the following:
upon the conversion from a domestic enterprise to an FIF,
invested transportation logistics enterprises that have not yet applied for, or obtained a
formal recognition from the tax authorities, it is crucial to register properly with the relevant
Chinese tax authorities and he recognised as engaged in the transportation
business.
Enterprises engaged in transportation and logistics would normally be
subject to business tax at a rate that varies depending on the specific type of business. The
rate applicable to businesses involved in transport agency, warehousing customs
clearance agency and constancy would be 5 per cent, compared with 3 per cent for
transportation activities. The tax author-ities would generally consider enterprises engaged
in the provision of trans portation/logisties services through their own transportation means
as being engaged in transportation business, and would thus be subject to business tax at
3 per cent.
Cross-city operations
It is also common for enterprises engaged in
transportation or logistics to be granted licenees to operate only within a particular city,
such as Shenzhen; for cross-city provincial business., they may need to subcontract part of
the services to other enterprises.. The local tax authorities may only treat the por-tion of the
services income in relation to services performed in Shenzhen as transportation in nature
and be subject to 3 per cent business tax. The por-tion of services income outside
Shenzhen may be regarded as 'agency busi-ness' and he subject to 5 per cent business
tax.
Multiple business tax is a common inefficiency for transportation and logistic
enterprises but proper planning can mitigate such tax exposures and yield savings. For
cross-border businesses, business tax should be imposed on the portion of revenue
related to services performed within China. For transportation enterprises that carry
passengers or cargoes from China to overseas locations and trans-ship passengers or
cargoes to other transportation enterprises overseas, the taxable turnover should be the
bal-ance of transportation charges for the whole journey less the charges paid to the sub-
contracted transportation enterprises.
It is very common for transportation logistics or
freight forwarding enterprises to subcontract part of their services to other transportation
enter-prises especially those involving cross-city or cross-province businesses. Based on
a new tax circular issued jointly by the Ministry of Finance and the State Administration of
Taxation, approved enterprises can secure a deduc-tion in the corresponding
transportation fees paid to other companies from the gross transportation fee received for
the calculation of business tax.
In light of recent relaxations, foreign investors should
revisit their entry
or expansion strategies to capture new opportunities:
operations in the mainland by setting up majority-owned joint
ventures,
the foreign equity interests in existing joint ventures;
existing domestic enterprises;
mitigate China tax risks and
rectify any regulatory non-compliance;
necessary approvals licenses from die relevant Chinese authorities;
tax planning opportunities to achieve overall tax efficiency.
Written by Pertnia Tam,
partner and Jeremy Ngai, senior manager of Price waterhouse Coopers ' China tax
services division in Hong Kong.
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