China Issues Q&As on Foreign Exchange Reform for Service Trade

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Jul. 31 – China’s State Administration of Foreign Exchange (SAFE) released a set of Q&As regarding the “Circular on Foreign Exchange Administration Reform for Service Trade (hereinafter referred to as the ‘Circular’)” on July 24. Detailed information can be found below.

Q: What’s the background of the reform?

A: In the 12th Five-Year Development Plan for the Service Industry, China’s State Council has laid down the following tasks for the development of the country’s service industry:

  • Expanding the opening-up scope of service industry;
  • Developing the service trade;
  • Establishing and perfecting the promotion system for service trade;
  • Improving laws and regulations regarding the service trade; and
  • Facilitating the service trade.

Moreover, under the “Guiding Opinions on Financial Support for Adjusting, Transitioning and Upgrading of the Economic Structure” released on July 5, the State Council points out that the country should focus on facilitating trade and investment, streamlining administration procedures for foreign exchange, as well as improving the foreign exchange administration system for goods trade and service trade.

Based on the above-mentioned concerns, SAFE has decided to roll out the foreign exchange administration reform for service trade nationwide from September 1, 2013, thereby providing a better foreign exchange administration system for the service trade.

Q: How does the reform facilitate the foreign exchange administration?

A:  The reform aims to provide more convenience to domestic institutions and individuals carrying out foreign exchange business under the service trade.

Changes introduced by reform are as follows:

  • Cancelling the approval of foreign exchange purchases and payments under service trade and allowing all foreign exchange purchases and payments under service trade to be handled directly at financial institutions;
  • Canceling the document verification for any single foreign exchange receipt and payment transaction under service trade for amounts less than US$50,000 or equivalent;
  • Simplifying the verification procedures for businesses that still need to go through document verification; and
  • Relaxing conditions for domestic institutions to deposit their foreign exchange earnings under service trade overseas, and allowing enterprise groups to deposit their foreign exchange earnings under service trade overseas.

Q: Has the reform introduced any changes to the tax policies regarding external payments?

A: The State Administration of Taxation and SAFE jointly released the “Announcement on Issues Concerning the Tax Record-Filing for External Payment under Service Trade” on July 9, which has put forward the reform plan regarding the tax policies for external payments:

  • Cancelling the submission of tax certificate for making external payments; and
  • Implementing a tax record-filing system for external payments, meaning individuals and entities can make external payments as long as the relevant tax record-filing procedures have been completed.

Q: What’s the underlying reason for cancelling document verification for foreign exchange receipts and payment transactions under service trade with amounts less than US$50,000 or equivalent?

A: The US$50,000 benchmark was chosen based on the statistics of foreign exchange receipts and payments under service trade in recent years. Our 2012 statistics suggest that the new foreign exchange rule will save time for the 88 percent of transactions that involve less than US$50,000 per transaction. This is expected to further increase the efficiency of foreign exchange administration.

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