China’s ballooning foreign trade surplus, which has grown continually now for 39 consecutive months, caused the Chinese government on June 19, 2007 to announce major downward adjustments to export VAT refund rates. This means that profits of exporters in many industries will fall significantly. The announcement makes clear that the reductions of refund rates, and even the complete elimination of the export VAT refund in some cases, will apply to over 2,800 types of products. These will include not only products that are socially or environmentally harmful (e.g. pollution-inducing, high energy or natural resource-consuming) and products from low value-added industries (e.g. clothing and shoes), but also for strong export products such as electrical and mechanical equipment as well as electrical appliances. The changes come into force on July 1, 2007.

The Finance & Taxation is delighted to welcome Desmond Yeung, Head of Indirect Tax Service Line, Tax Partner, Deloitte, Shanghai.

Mr. Yeung will cover in his presentation and during the Q&A session both the wide-reaching consequences of these newly reduced VAT refund rates as well as ideas of what to do to mitigate their effects.

Agenda

8.00 am Registration
8.30 am Presentation
9.15 am Q & A moderated by Simon Tan, Vice-Chairman of the F & T WG

Registration

To register for this event, please email this form to Ms. Mahsa Bouromand  at mbouromand@euccc.com.cn by Monday, June 25th, noontime.
Confirmations and cancellations by phone are not accepted. Please note that we require 24 hours notice for cancellations.

No-shows who fail to cancel before this time will be invoiced for the event.
Registrations done after the deadline will be accepted only if space permits and are charged an additional 50 RMB walk-in fee.

Company:

Member of the European Chamber:     Y (   )      N (   )

Name of Attendee(s):      1)                                              2)

Phone:

Fax:

Event review

This European Chamber Breakfast Seminar enjoyed a high turn out for the demanded topic of Customs in China.

Reacting immediately to the June 19th release of the changes to the VAT rebate on exports, the Finance and Taxation Working Group of the European Chamber in Shanghai organized a seminar, moderated by Vice Chair of the Group, Simon Tan, to address the concerns of members.

Behind the changes

This new rule will affect almost 2,381 tariff headings, principally those in high polluting and high energy materials, as well as products that consume scarce natural resources. It is anticipated that it will have a wide-spread impact on European industry in China.

VAT in China is not just a consumer tax as it is all over the world, it is an active cog in the macro economic policy of the Chinese government. By having this rebate system through the production process, authorities are able to use VAT to leverage more than tax revenue. The government (which in this case includes five bodies: MOF, Customs, SAT, NDRC and SEPA) are using it to address the ballooning trade surplus and also to control the types of products manufactured in China.
The seminar was set up to do two things: firstly, to look at the nature of the regulations and secondly to show some ways that companies can limit their impact.

Understanding the New Regulations

Mr. Desmond Yeung of Deloitte Touche Tohmatsu introduced the background of the changes in terms of trade surplus and also in discouraging the development of the highly energy-consuming, environment-polluting and natural-resources-consuming industries. The new rule was promulgated on June 19 and will be effective July 1. The time-lag between the promulgation and implementation is intentionally quite short.  He showed the most affected industries and also a simple equation for calcutaing the irrecoverable VAT.

Moving on to the practical ways that companies can limit the impact of the new rules, Mr. Bob Fletcher, also from Deloitte Touche Tohmatsu, introduced two concepts, ‘Passive’ and ‘Dynamic’ planning . While China has adopted the harmonized coding system, there is still room for interpretation. Different rates apply to different codes and therefore it is important to make sure that the correct codes are selected for documentation. This is what Mr. Fletcher called ‘Passive Planning’.

Also, it is often the case different VAT export refund rates apply to finished products; semi-finished products, sub-assemblies; components or materials. Adding or removing a process done in China may alter the products classification and rating in China as part of what he described as ‘Dynamic Planning’.
The next important issue is to look at the business model that a company is using, be it buy/sell, contractual manufacturing or toll manufacturing. All these incur different rates, particularly if materials are imported under bond. It may also be possible to have local companies use bonded logistics parks to avail of some benefits.

Important considerations

These changes were anticipated, following on from similar changes in September and April, and more may follow. Even still, their scale and scope means that companies will have to seriously consider the profitability of their China operations, few will have the luxury to absorb such a dramatic change without serious consequences.

However, in general, taking the time to look at the business model of your company and the tariff classifications is, for now, the best place to start when trying to limit the impact.

To view Deloitte's presentation please  click here.

Related

Contact