By Dezan Shira & Associates
Editor: Ari Chernoff
Editor’s note: This article was originally published on March 11, 2013, and has been updated to include the latest regulatory changes.
Over the course of 2016, the Chinese government promulgated a series of new regulations affecting companies that import and export taxable goods and services in China. These new regulations expand on previous import and export taxes and duties, which vary depending on the products involved.
However, at the center of this intricate system is a central list of general principles for foreign companies to abide by. Below, we outline the most significant issues relating to these taxes and duties that foreign companies should take note of.
Companies importing products from, or exporting products to, China will generally come into contact with the following three types of taxes:
- Value-added tax
- Consumption tax
- Customs duties
Value-added Tax for imported goods
All goods imported into China are subject to the nation’s value-added tax (VAT) of either 13 percent or 17 percent. The 13 percent tax is available for certain goods that fall mainly within the categories of agricultural and utility items, while the 17 percent tax applies to other goods subject to the VAT tax.
The input VAT (Sales x VAT rate), which is the VAT amount paid when purchasing products or taxable services, can often be used for deduction against output VAT, which is the VAT amount charged to the buyer by the seller of a good or taxable service.
Consumption Tax for imported goods
China’s consumption tax (CT) is imposed on companies and organizations who manufacture and import taxable products, process taxable products under consignment, or sell taxable products.
Imported products taxable under China’s consumption tax include those that are harmful to one’s health like tobacco or alcohol, luxury goods like jewelry and cosmetics, and high-end products such as passenger cars and motorcycles.
For imported goods, consumption tax varies depending on the type of product being brought into the country. Calculating consumption tax can be done by using either the ad valorem or quantity-based method.
Customs duties include import and export duties, with a total of 8,294 items taxed, according to China’s 2016 Customs Tariff Implementation Plan (“2016 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 and special preferential 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.
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.
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, goods imported within the quota are subject to a lower tariff rate, and goods imported beyond the quota are subject to higher tariff rates. For example, the TRQ rate for importing wheat within the quota is one percent – substantially lower than the MFN duty rate of 65% and the general duty rate of 130%.
Temporary duty rates
China also sets temporary duty rates for certain imported goods in order to boost imports and meet domestic demand. In 2016, China implemented temporary tax rates, which are even lower than the MFN tariffs on more than 787 imported commodities, including on diapers (2%), sunglasses (6%), kaolin (1%), and skincare products (2%).
What’s new this year?
Starting June 1, 2015, China slashed tariffs by 50% for 14 categories of goods. These relaxed tariff rates come at a time when the government is playing with fiscal policy in order to increase domestic consumption.
The new tariff rates for the targeted import goods can be found below:
- Cosmetics and Skin Care Products: 2% (from 5%)
- Shoes (sports shoes, boots, etc.): 12% (from 22-24%)
- Fur Clothing: 10% (from 23%)
- Men’s and Women’s Suits and Outwear: 8-10% (from 17.5-24%)
- Kashmir wool, knitted, and crocheted items: 7% (from 14%)
- Diapers: 2% (from 7.5%)
Other duty rates
Considerably higher rates may be implemented according to Chinese regulations regarding dumping, anti-subsidies, and safeguard measures. Retaliatory tariffs could also be applied to goods originating from countries or regions that violate trade agreements.
Duty Relief for Key Technical Equipment
China has recently released the “Catalogue of State-supported Key Technical Equipment and Products (2015 version),” which took effect on January 1, 2016. Exporting certain technical equipment and products listed in the catalogue to eligible Chinese domestic enterprises is now exempt from custom duties.
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). The 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 payable can be calculated after determining the DPV and the tax and tariff rates of the goods. The formulae are:
Ad valorem basis:
Duty payable = DPV x Tariff rate
Duty payable = Quantity of imported goods x 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 2016, China continues to levy temporary tariffs on exports including crude oil, chemical fertilizers and iron alloy in order 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 the 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 February 2016 issue of China Briefing Guide titled, “Tax, Accounting and Audit in China 2016.” This edition of Tax, Accounting, and Audit in China, updated for 2016, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations. It is used by the Guanghua School of Management, Peking University as course reference material.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira 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 China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
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