Special Customs supervision zones are in the vanguard of the development of the open economy in China and have made great contributions to establishing China as a trading giant and enhancing the international division of labor. In recent years, as global markets remain sluggish, it has become increasingly difficult for enterprises in the zones to conduct processing trade featuring import of raw materials and export of finished products. To boost the enterprises within the zones to fully enjoy the dividends of the tax system reform, the State Administration of Taxation (SAT), the Ministry of Commerce (MOF), and the General Administration of Customs (GAC) have jointly issued the Announcement on a Pilot Program on Qualifying Enterprises inside the Special Customs Supervision Zones for General VAT Taxpayers (Announcement), to boost the stability and thriving of foreign trade.
Enterprises inside special Customs supervision zones have become increasingly reliant on the booming domestic markets
To better promote economic restructuring and industrial transformation and upgrades, China has carried out a series of reforms on the VAT system in recent years, of which the most important are about VAT transformation and VAT pilot program. With these reformative measures, the chain of input VAT credits has been refined and the VAT burdens on domestic enterprises have been reduced further. Alongside the boom of domestic markets, enterprises inside special Customs supervision zones have begun to actively participate in the domestic markets, with their operational models transformed towards the model that utilizes domestic and overseas markets and resources, so as to better mitigate external risks.
"To facilitate domestic sales and purchases of domestic-made materials, enterprises inside special Customs supervision zones expect to obtain the general taxpayer qualification and enjoy the dividends of the tax system reform," said Tang Jiqiang, professor at Southwestern University of Finance and Economics and chief research fellow at Xicai Thinktank.
According to an official at the SAT Goods and Services Taxation Department, to strongly support enterprises inside special Customs supervision zones to integrate into global industrial division of labor and cooperation, fully utilize domestic and overseas markets and resources, extend the industry chains of foreign trade in China, and enhance the added value generated by processing trade in China, the SAT, together with the MOF and GAC, has conducted in-depth surveys on a pilot program for qualifying enterprises inside special Customs supervision zones for general VAT taxpayers, and finalized the pilot policy.
The Announcement specifies that a pilot program on qualifying enterprises for general VAT taxpayers will be conducted in Kunshan Comprehensive Bonded Area, Suzhou Industrial Park Comprehensive Bonded Area, Shanghai Songjiang Export Processing Zone, Henan Zhengzhou Export Processing Zone, Zhengzhou Xinzheng Comprehensive Bonded Area, Chongqing Xiyong Comprehensive Bonded Area, and Shenzhen Yantian Comprehensive Bonded Area.
"This pilot program will be carried out on voluntary participants. Any enterprise that conducts domestic sales or needs to purchase raw materials, machine equipment and services from across the country, could choose to participate. Any enterprise that engages in the import of raw materials and export of finished products could continue to follow the existing tax policies," said the official from the SAT Goods and Services Taxation Department.
According to the Announcement, any enterprise in the pilot region that meets the provisions on registration management of general VAT taxpayers can apply at their discretion to the local competent tax authority and Customs for participating in the program, and duly go through general VAT taxpayer registration with the local tax authority. Every pilot enterprise could issue special VAT invoices for the goods for domestic sales (including goods sold to other pilot enterprises), and file returns on VAT and consumption taxes as required.
Tremendous benefits for pilot enterprises in the Zone
This pilot policy could help establish a chain of input VAT credits between enterprises inside and outside the Zone, allowing enterprises inside the Zone to claim full input tax credits, thereby effectively reducing tax burdens, said Fan Yong, professor at the Central University of Finance and Economics.
- All pilot enterprises are entitled to the general VAT taxpayer policy. According to the Announcement, every pilot enterprise can apply for special VAT invoices for its purchases of goods from outside the special Customs supervision zone (outside the Zone), which will serve as the voucher for claiming input VAT credits (for domestic sales of goods bought) and for applying for export tax refunds (for overseas sales of goods bought). Any goods bought from outside the Zone under processing trade will continue to be subject to the existing tax policies.
- Domestic and overseas sales will be subject to different import tax policies. Given that pilot enterprises may engage in exports and domestic sales, the Announcement sets forth different import tax policies. Any pilot enterprise that imports equipment for self use such as machine equipment, infrastructure articles and office supplies will be exempt from import tariffs, VAT at import stage, and consumption tax (import taxes). The interim exempted import taxes will be divided on a pro rata basis per annum, according to the length of Customs supervision of the imported self-use equipment. At the end of each year, the import taxes exempt for the year will be divided based on the ratio of internal to overseas sales. To be specific, overseas sales will be subject to the tax policy for pilot enterprises inside the Zone, and domestic sales will be levied in accordance with the tax policy for enterprises outside the Zone.
In Tang Jiqiang's view, exempting taxes on imported equipment for overseas sales will be favorable for enterprises inside the Zone to participate in global competition, while levying import taxes on equipment imported for domestic sales reflects the principle of tax equality and will be favorable for enterprises inside and outside the Zone to participate in domestic market competitions as equals.
- The export tax refund policy for pilot enterprises will be refined. The Announcement stipulates that any pilot enterprise that exports goods should apply for tax refunding after the departure of the goods from the territory of China; and any pilot enterprise that sells goods to non-pilot enterprises inside the Zone, except bonded goods that are not processed, will be subject to the export tax refund policy.
Policy advantages will be changed into enterprise growth advantages
According to Li Wanfu, director of the SAT Taxation Science Institute, treating enterprises inside and outside the Zone as equals in terms of VAT and consumption tax systems, tax policy, administration system and management approach underscores the principles of common levying of VAT, tax equality and elimination of double taxation, and enhances reasonable expectations of enterprises' production and operations alongside the consistency and standardization of the national tax systems, providing more favorable tax environment for investment decisions. On the other hand, sustaining the existing policies for non-pilot enterprises will enable them to carry out export-oriented business activities.
For Chinese enterprises outside the Zone, as the tax burden arising from sales to enterprises inside the Zone can be passed on to buyers, with no production costs increased due to insufficient tax refunds, their tax burdens will also be reduced. "As the policies for bonded imports of raw materials and exemption of taxes on imported equipment are retained, enterprises inside the Zone will be eligible for significant tax preferences for exports," said Hu Yijian, professor at Shanghai University of Finance and Economics.
The introduction of the Announcement will promote in-depth integration of industry chains inside and outside the Zone and sharpen the competitive edges of enterprises inside and outside the Zone in both domestic and overseas markets. The pilot program will offer convenience to enterprises inside the Zone in domestic sales, and cut the operational costs on sales to enterprises inside the Zone by those outside the Zone, so that the two sides could perform better in competitions in domestic and overseas markets. Further, in the case of sluggish global markets, enterprises inside the Zone that are originally export-oriented could find their way out of trouble by participating in domestics markets, while enterprises outside the Zone could expand channels to international markets by cooperating more with export-oriented enterprises inside the Zone, thus ensuring fast and smooth "going global".
"The Announcement will help reduce the operational costs and tax burdens of enterprises inside and outside the Zone to push foreign trade to a new high," said Xu Zhengzhong, professor at the Chinese Academy of Governance.
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