E-shots Web-exclusive: Taxes on imports/exports in China

For any converter looking at joint ventures or moving some production to China, understanding the tax structure and how it relates to imports and exports is crucial. Much as a company takes the time to plan ahead for tax liabilities in the West, a little planning can make a huge cost difference in China.

While this article couldn’t possibly cover all the intricacies of Chinese tax law, there are a few things any manager looking at potential costs of a China venture should keep in mind. This article focuses on two key tax structures regarding resin and imports/exports, and the Value Added Tax and Import Duties.

The first rule of taxes is that there is rarely a simple answer. So the answer to the question, “How much is the Value Added Tax?” is a bit complex.

The short answer is that the VAT will typically be 17% for all resin, domestic and imported, regardless of which type of resin is used. But there’s a hitch—the Chinese government will rebate most, if not all, of the VAT on imported resin if the finished goods are also being exported.

These rebates are called Export Drawback, and refund rates are 3%, 5%, 8%, 13%, or 17% (equal to the full VAT rate). Typically, companies that export finished goods will see 13% rebates, which means the VAT on imported resin is lowered to about 4%.

Be warned, however, that the amount of the rebate often depends mostly on the relationship between the local government and the company. Friendly ties with the local government go a long way toward keeping that rebate high.

That also means that any new venture into China should start with a decision on what level of government that company needs to deal with. For example, a smaller operation could forge strong local ties, while a large company may deal primarily with the national government.

Any way you go, all three levels of government—local, provincial, and national—will each need to be addressed. But close ties with the right level could smooth the way for better dealings across the board.The Export Drawback rebates depend on the company exporting the finished goods. If the imported resin is used for a product that is to be sold domestically, the government will not offer any rebate. Domestic resin does not qualify for rebates, even if the finished goods are exported.

So why not use only imported resin and enjoy the rebate on VAT? First, imported resin is typically more expensive than domestic. For example, in October, imported High Strength LDPE resin from Korea LG was selling for CNY900 (or US$114) per tonne more than domestic resin. Second, there’s the delay in delivery. A shipment of resin from Singapore or Japan can take eight days; from Los Angeles, it can take 18 days.

In many cases, turnaround speed can also make a difference in total tax costs. Completing and processing the paperwork on imported resin can take weeks, and in some cases, the finished goods are already on a boat heading to the West before the VAT comes due. In those cases, a company can request a rebate and avoid having to pay out of pocket. In fact, it’s often easier to negotiate a full rebate in these situations.

Besides rebates, there are also exemptions to the VAT allowed in certain cases. While resin typically wouldn’t be able to escape the VAT, imported equipment and materials can be exempted if used for research, or if gifted by a foreign government, or under a wide variety of other unique cases. A company looking to upgrade a joint venture partner or new acquisition should take a hard look at whether these exemptions can be made to fit any equipment and materials brought in.

In addition to the Value Added Tax is a second expense for imported resin—the Import Duty. For imports from nations with Most Favored Nation status (which will include most Asian and Western countries), this is a tax ranging from 6.5%-10% (see the chart for specific rates by resin). By 2008, these different rates are scheduled to become more standardized, typically at 6.5%. They will be falling in 2007 to meet that goal.

The import duty does not offer a rebate, but there is another alternative—the Import License.A company that is importing resin and exporting finished goods can ask the government for an import license. It allows a certain amount of raw materials to be imported without paying the import duties, as long as a specified amount of finished goods is being exported.

For example, if CPR Plastics plans to import 200,000 lb of resin to make 20,000 units for export, it can request an import license. The license allows it to avoid import duties on the 200,000 lb of resin if all 20,000 units are exported.

If CPR Plastics imports more than 200,000 lb of resin, it would have to pay the import duties on the additional resin. If it imports less, then when it renews the license for the next year, the level of allowable import is reduced to match the actual imports. Same goes for the export levels.

But, as always, there’s a catch. A company can sell part of its license.

For example, if CPR Plastics knows it will not produce enough finished goods or import enough resin to fill the limit of the license, it can sell that leftover space to a company producing similar products. Or, if it appears the company will need to import extra resin and increase exports, it can buy space from a competitor’s license.

The license is obtained from the Ministry of Commerce, or from the local Foreign Economic Relations & Trade Commission office. It should be obtained before any goods are imported, and once the first imports arrive, the import license should be given to customs officials. Be warned that customs will confiscate any imported goods not covered by an appropriate license and penalize the company involved.

Properly managing the space under the license will make a hefty difference on the bottom line. It’s important that the person handling this job have the contacts and ability to either secure additional license space or sell off surplus.

A company making an entry into China will typically hire local experts to assist with the complexities of taxes and import duties. In fact, one reason that many resin converters buy resin from distributors rather than directly from importers is to avoid having to deal with VAT or import duties.

Even then, only larger distributors typically buy imported resin, and then sell it off to other distributors as well as converters.

For those converters that do buy resin directly from importers, many will turn to outside agencies that handle the complex paperwork involved with imports.

In addition, the tax laws face continuous revision at the local, provincial, and national levels, just as they do in the West. But having a basic understanding of the two key taxes involving imported resins and finished goods is crucial to successfully finding competent and effective tax help.

Jerry Fordyce is the director of media relations for Townsend Polymer. You can reach him at (281) 873-8733, ext. 140 or [email protected]. This article originally appeared in the China Plastic Review.