Since announcing at the end of 1995 that it was phasing out duty and VAT exemptions for foreign investment enterprises, the Chinese government has kept this policy under review. It is not perhaps altogether surprising, therefore, that the recent decline in the rate of contracted foreign investment in China has coincided with the State Council Notice on Adjustment of Policy on Taxation of Imported Equipment dated December 29, 1997, which announced a new policy of exemptions effective from January 1 this year. The urgency of the situation was high-lighted by a China Daily article last month in which an unnamed senior trade official said that actual foreign investment might drop for the first time in China's history. The financial crisis in Asia is a major concern, not least because of the fact that the majority of inward investment comes from the region.
The new policy exempts investment projects from customs duties and import-stage value added tax on equipment imported for their own use within the total investment amount. Unlike the former policy, the new policy applies to domestic projects as well as foreign investment projects ?but not all projects benefit.
To be eligible for the exemption, foreign investment projects must be categorised as 'encouraged' or 'category B restricted', and not 'permitted' or 'category A restricted'. These categories are listed in the State Planning Commission's new Foreign Investment Industrial Guidance Catalogue, promulgated at the end of last year to replace the catalogue in the Provisional Regulations on Foreign Investment Guidelines (although the regulations themselves have not been superseded). The sectors are drawn from a wide range of industry andinclude high-technology industries, new technologies, transport and telecommunications equipment, electric power generation, aviation, oil and petrochemicals, machinery, electronics, pharmaceuticals, medical equipment, metals and metallurgy, light industry, the service sector and agriculture. In total, 18 industries were listed, representing the sectors in which China is hoping to promote foreign investment.
Domestic projects must comply with the Catalogue of Key Industries, Products and Technologies whose Development is Currently Encouraged by the State, approved by the State Council on December 29, 1997 and effective from January 1, 1998.
The new policy also exempts equipment imported for use by projects with loans from foreign governments or inter-national financial institutions, and imported equipment provided by foreign investors on a non-assessment basis for process trade.
At the same time, the new policy does not apply to imported equipment listed in the Foreign Investment Projects Non-Tax-Exempt Imported Commodities Catalogue and its domestic equivalent.
Madam Wu Yi, Minister of Foreign Trade and Economic Co-operation, stated in a recent interview that the rationale for excepting the items listed in these catalogues was to discourage imports of machinery and equipment with low technological content or which can be produced domestically on the basis of a guaranteed supply. Another reason is to protect China's infant industries.
The exemption is obtained by carrying out import tax exemption procedures at local customs, based on presentation of a 'confirmation certificate' issued by the body approving the project's feasibilitystudy report. The confirmation certificate confirms that the project is of a type to which the exemption policy applies.
Foreign investment projects must also present their approval documents and business licence. Customs will check that none of the items for which exemption is required are in the non-tax-exempt imported commodities catalogues.
Starting January 1, 1998, equipment imported for technological renovation projects properly approved on or before March 31, 1996 and originally granted a reduction or exemption in duty and tax is fully exempt from import customs duty and import-stage value added tax. This exemption may be obtained from local customs on the basis of the original approval document.
Application to old projects
Furthermore, in her interview Madam Wu Yi added that, generally in the case of foreign investment projects properly approved on or before March 31, 1996, equipment and raw materials within the total investment amount imported for the projects' own use would be exempt from irnpoit customs duty and import-stage value added tax until importation is completed. She gave no cut-off time, as had been done in earlier policy pronouncements.
Also starting January 1, 1998, equipment imported for projects properly approved between April 1, 1996 and December 31, 1997, and for projects using loans from foreign government loans or international financing organisations from January 1, 1995 to December 31, 1997, is exempt from import customs duty and import-stage value added tax, except for items in the non-tax-exempt imported commodities catalogues. Again, this exemption may be obtained from local customs on the basis of the original approval document.
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 Hong Kong office, tel (852) 2846 3400 or Beijing office, tel (86) 10 6410 6338 or by e-mail (email@example.com).