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Changes in PRC Import Taxation Policy

An imminent change in PRC tax regulations could raise costs for foreign investment projects involving imports of equipment into China. The Adjustment of Certain Preferential Import Tax Policies Circular (Notice No. 146), which was issued September 10 and effective October 1 2002, signals the end of equipment import tax exemptions for projects that do not satisfy a number of criteria outlined in recent regulations.

All-For-Export Permitted Foreign Investment Projects

The most significant policy change targets imports of equipment used to manufacture products intended exclusively for export. Foreign-invested projects listed in permitted categories under the Foreign Investment Industrial Guidance Catalogue that directly export all of their products (all-for-export projects) will now be invariably subject to customs duties and an import stage value-added tax (VAT) on any imported equipment.

After payment of taxes on imported equipment, all-for-export projects will be eligible for rebates of their paid import taxes. The rebates will be issued at a rate of 20% per year over a period of five years. Such refunds, however, will only be issued if the projects comply with their export commitments. Projects that fail to meet their export commitments are required to repay the rebated taxes to the government and will be subject to additional penalties.

Under the new regulation, all-for-export projects that have already been approved will retain their tax-exempt status. However, if these projects require imports of equipment after the new policy comes into effect, their compliance with exporting requirements will also be subject to verification for a five year period starting from the date of commencement of production. Overall, the new policy means that all-for-export projects, whether new or previously approved, will now be subject to strict verification of their compliance with export commitments.

Projects Approved Prior to April 1996

Under the new regulation, some types of projects approved before April 1 1996 may import equipment exempt from customs duties and import-stage VAT. Projects in the following categories are eligible for exemption: (i) foreign investment projects; (ii) projects funded with loans from foreign governments or international financial organizations that are subject to foreign investment policies; (iii) infrastructure projects (including large-scale construction); and (iv) technical renovation projects. To qualify for the exemption, the equipment must be imported for use by the project itself (i.e., it may not be resold to other parties in China) within its total investment budget.

The exemption, however, does not apply to an extensive list of equipment contained in the General Administration of Customs, Import Commodities Not Exempt from Duty and Tax for Foreign Investment Projects Catalogue (Trial Implementation) and the General Administration of Customs, Import Commodities Not Exempt from Duty and Tax for Domestic Investment Projects Catalogue.

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