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.