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Changes in PRC Import Taxation Policy

In other words, the projects listed above will now be eligible for preferential tax treatment for equipment imports introduced in 1997 under the State Council, The Adjustment of Tax Policies on Imported Equipment Circular (Notice No. 37). However, the import duty exemptions under Notice No. 37 already apply to the majority of the projects outlined above, such as: (i) projects funded with loans from foreign governments or international financial organizations; (ii) technical renovation projects; and (iii) foreign investment projects approved after October 1 1995.

No Other Import Duty Exemptions Permissible

The point that should concern foreign investors the most is the announcement in Notice No. 146 that, once the new policy comes into effect, the PRC authorities will generally not accept or approve any applications for exemption or reduction of import taxes for individual projects. The new regulation also reiterates the existing policy that raw materials are not exempt from import duties.

Although not stated explicitly in Notice No. 146, the blanket ban on new exemptions for individual projects will not apply to projects that already enjoy exemption from import duties. The list of such import tax-exempt projects was most recently confirmed in the General Administration of Customs, Questions Relevant to the Implementation of the Circular dated April 4 2002 (Notice No. 81). Specifically, projects in the encouraged category under the Foreign Investment Industrial Guidance Catalogue that involve technology transfer and satisfy certain qualification criteria would be exempt from payment of customs duties and import-stage VAT. In addition, other projects previously exempt from import taxes would continue to enjoy preferential treatment. For instance, projects qualified for exemptions that were listed in the encouraged and restricted B categories in the 1997 version of the Foreign Investment Industrial Guidance Catalogue (i.e., prior to its revision in March 2002) would still retain previously enjoyed exemptions.

Foreign investors should note the announcement in the new regulation that the approval of the State Council is required for exemption or reduction of import duties in projects not previously exempt from import duties. This implies that, despite the trend towards strict control of import tax exemptions, individual projects can still obtain the exemptions with the State Councils’ blessing.

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