By Shirley Zhang
Mar. 11 – One of the most important issues facing companies conducting trade with China is the subject of taxes and duties imposed on goods imported into and exported out of the country. This is a complex subject, and rates and regulations differ of course from product to product, however there are general tax principles to follow, and we outline the most important issues foreign companies should be aware of below.
Importing to and exporting from China generally involves three types of taxes:
- Value-added tax;
- Consumption tax; and
- Customs duties.
1. Value-added Tax for Imported Goods
Imported goods to China are subject to value-added tax (VAT), and the applicable tax rates are the same as those applied to goods sold within the domestic market (i.e. 17 percent, and 13 percent for some goods). VAT is payable on the day of customs clearance.
The input VAT imposed on importing goods can be used to deduct the output VAT paid when the imported goods are sold in the domestic market.
2. Consumption Tax for Imported Goods
Items subject to consumption tax (CT) include luxury products such as high-end watches, non-renewable petroleum products such as diesel oil, and high-energy consumption products such as passenger cars and motorcycles.
Import CT is collected either on an ad valorem basis or quantity basis, with tax rates and amounts varying greatly. CT should be paid within 15 days from the day that Customs issues the Import CT Bill of Payment.
3. Customs Duties
Customs duties include import duties and export duties, with a total of 8,238 items taxed, according to China’s 2013 Customs Tariff Implementation Plan (“2013 Tariff Plan”). Customs duties are computed either on an ad valorem basis or quantity basis.
Duty rates on import goods consist of:
- Most-favored-nation duty (MFN) rates;
- Conventional duty rates;
- Special preferential duty rates;
- General duty rates;
- Tariff rate quota (TRQ) duty rates; and
- Temporary duty rates.
MFN duty rates
MFN rates are the most commonly adopted import duty rates. They are much lower than the general rates which apply to non-MFN nations. They apply to the following goods:
- Goods imported to China from WTO member countries;
- Goods originating from countries or territories which have concluded bilateral trade agreements containing provisions on MFN treatment with China; and
- Goods that originated from China.
Conventional duty rates
Conventional duty rates are applied to imported goods that originate from countries or territories that have entered into regional trade agreements containing preferential provisions on duty rates with China. Under the 2013 Tariff Plan:
- 1,875 imported goods originating from South Korea, India, Sri Lanka, Bangladesh and Lao adopt the Asia-Pacific Trade Agreement conventional duty rates.
- Certain commodities from members of the Association of Southeast Asian Nations (ASEAN), Chile, Pakistan, New Zealand, Singapore, Peru and Costa Rica are subject to conventional duty rates under the relevant free trade agreements.
- Some imports from Hong Kong, Macau and Taiwan enjoy tariff-free policies.
Special preferential duty rates
Special preferential duty rates are applied to imported goods originating from countries or territories with trade agreements containing special preferential duty provisions with China. They are generally lower than MFN rates and conventional duty rates.
Under the 2013 Tariff Plan, special preferential duty rates are applied to certain goods originating from 40 Least Developed Countries as classified by the United Nations. These countries include Ethiopia, Rwanda and Afghanistan.
General duty rates
General duty rates are applied to imported goods originating from countries or territories that are not covered in any agreements or treaties, or of unknown places of origin.
Tariff rate quota duty rates
Under tariff rate quota (TRQ) schemes, lowered tariff rates are applied to products imported within the quota. For example, according to the 2013 Tariff Plan, the TRQ rate for importing wheat within the quota is 1 percent, substantially lower than the MFN duty rate of 65 percent and the general duty rate of 80 percent.
Temporary duty rates
Occasionally, China sets temporary duty rates for certain imported goods. To boost imports and meet domestic demand in 2013, China implemented temporary tax rates lower than the MFN tariff on more than 780 imported commodities, including seasoning products, pacemakers, special-formula infant milk powder, and resources including kaolin, alfalfa and eiderdown.
Other duty rates
Considerably higher rates may be implemented according to Chinese regulations regarding anti-dumping, anti-subsidies, and safeguard measures. Retaliatory tariffs could also be applied to goods originating from countries or regions that violate trade agreements with China.
Place of Origin
In order to apply the correct tariff rate, it is necessary to first determine the place of origin of the goods. According to China’s place of origin regulations, where goods are completely sourced from one country (or territory), that country will be the place of origin of the goods, e.g. live animals born and bred, plants harvested, and minerals excavated in the country.
Where the goods are produced in two or more countries or territories, the country or territory where the goods undergo a final substantial change and completion is the place of origin of the goods.
The basic standard for determining “substantial change” is a change in tariff classification. Supplementary standards for determining “substantial change” include the ad valorem percentage method, which tests the value added percentage in the manufacturing or processing carried out in the country other than the country of the original materials.
Processing and treatment carried out for purposes of evading anti-dumping, anti-subsidy and safeguard measures will be disregarded. Customs is entitled to request a certificate of origin, i.e. a written document issued by the exporting country or territory stipulating the place of origin of the goods.
Duty relief includes statutory duty relief, policy-based duty relief (or special tariff relief ), and temporary duty relief. Some items exempt from duties under statutory duty relief are:
- The duty amount to be paid for one consignment of goods if it is below RMB50.
- Advertising materials and trade samples of no commercial value.
Some goods are exempt from duties if they are re-exported or re-imported within six months after the import or export, for example:
- Goods to be exhibited or used at exhibitions, trade fairs, conferences and other similar events.
- Instruments, equipment and items to be used for scientific research and educational and medical activities.
- Other goods to be used for non-commercial purposes.
Policy-based duty relief includes:
- Scientific educational supplies;
- Special products for the disabled;
- Poverty alleviation supplies and charity donations;
- Processing trade products; and
- Goods traded in free trade zones and export processing zones.
Under special circumstances, the State Council may provide temporary duty relief for certain categories or batches of goods.
Duty Paying Value for Imported Goods
The amount of import taxes and customs duty payable is calculated based on the price or value of the imported goods. This value is called the duty paying value (DPV). DPV is determined based on the transacted price of the goods – i.e. the actual price directly and indirectly paid or payable by the domestic buyer to the foreign seller, with certain required adjustments.
DPV includes transportation-related expenses and insurance premiums on the goods prior to unloading at the place of arrival in China. Import duties and taxes collected by Customs are excluded from DPV.
Calculating Import Taxes and Duties Payable
Import taxes and duties can be calculated after determining the DPV and the tax and tariff rates of the goods. The formulae are:
1. Value-added tax
- VAT payable = Composite assessable price × VAT rate
Composite assessable price can be calculated as follows:
- Composite assessable price = DPV + Import duty + CT; or
- Composite assessable price = (DPV + Import duty)/ (1 – CT rate)
2. Consumption tax
Ad valorem basis:
- CT Payable = Composite assessable price × CT rate
- Composite assessable price = (DPV + Import duty)/ (1 – CT rate)
- CT Payable = Quantity of taxable goods × Tax amount per unit
- CT payable = Composite assessable price × CT rate +Quantity of taxable goods × Tax amount per unit
- Composite assessable price = (DPV + Import duty + Quantity of taxable goods × Tax amount per unit) / (1- CT rate)
3. Import duties
Ad valorem basis:
- Duty payable = DPV × Tariff rate
- Duty payable = Quantity of imported goods × Amount of duty per unit
- Duty payable = DPV x Tariff rate + Quantity of imported goods x Amount of duty per unit
Import taxes and duty payable should be calculated in RMB using the benchmark exchange rate published by the People’s Bank of China.
Export duties are only imposed on a few resource products and semi-manufactured goods. In 2013, China continues to levy temporary tariffs on exports including coal, crude oil, chemical fertilizers and iron alloy to conserve resources.
The tax base for export duties are the same as import duties – i.e. the DPV. The DPV for export duties is based on transacted price, i.e. the lump sum price receivable by the domestic seller exporting the goods to the buyer. Export duties, freight-related expenses and insurance fees after loading at the export spot, and commissions borne by the seller are excluded.
Portions of this article came from the March 2013 issue of China Briefing Magazine titled, “Trading with China.” This issue of China Briefing Magazine focuses on the minutiae of trading with China – regardless of whether your business has a presence in the country or not. Of special interest to the global small and medium-sized enterprises, this issue explains in detail the myriad regulations concerning trading with the most populous nation on Earth – plus the inevitable tax, customs and administrative matters that go with this.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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