It’s said early in 1990’s, that the container truck drivers shuffling between mainland China and Hong Kong were in excess of 10 thousand. Their main duty is to transport the mainland manufactured components and parts to Hong Kong, yet with no dispatch in the terminal, they would immediately turn around and head back to the mainland for part assembly. That was called “goods one-day-trip to Hong Kong” by Ms. Wu Yi, the deputy Premier of China at that time.
So, what drives such trips which cost however much? First, to transport mainland manufactured components to Hong Kong could make Chinese factories enjoy the tax refund as introduced in the last issue; second, for the assembling in China, any components thereby imported is under a bond, which means no tariffs shall be first paid for that import. After the export of the assembled articles, such tariffs shall then be paid. In conclusion, with this processing trade mode, less raw material or components would be occupied and the company could run the business under a no tax status; the advantage hereby produced is outrageous. Then, what tariffs may be paid during the process?
I. VAT of import and export
Generally speaking, any import of overseas product, including re-imported goods originally manufactured in China, shall first be reported to the custom house by the consignees or their agents, also the import tariff and VAT shall also be necessary.
- Import tariff
The calculation formula of import tariff: tariff amount= duty-paid value of imported products × tariff rate
duty-paid value of imported products = sales price + purchase expenses (including transportation expenses paid before arriving at the terminal in China, generally the first port such as inland river port, insurance premiums and other labor expenses), and the illustration is as follows:
The import tariffs of China include MFN tariff rate, conventional tariff rate, preferential tariff rate, normal tariff rate, quota tariff rate, etc. The selection of the specific tariff rate shall first judge the source land of the product, and any import of products manufactured in WTO acceded countries will be covered by MFN tariff rate. Second, to classify the products in duty paragraphs (HS code) with reference to Customs Import and Export of People’s Republic of China. After the determination of the source land and the duty paragraph, the specific tariff rate will be accordingly decided, and the custom house would levy the tariff with the published rate on the application day of the consignor.
In the mean time, the following two points shall also be considered in the calculation of the tariff: 1) the import tariff shall be paid in RMB, and when the imported goods are settled in foreign currencies, the tariff will be levied after the price is converted to RMB by the medial rate published by the foreign currency administration on the day of the duty-paid certificate issuance day; 2) the duty-paid price will be calculated in yuan: any amount below yuan will be rounded off. Also the tariff will be calculated to fen: any amount below fen will be rounded off; 3) Any tariff payable below RMB 50 will be exempted.
- Import VAT
The calculation formula for import VAT: import VAT= taxable composition price of import products × VAT rate
Taxable composition price of import products= duty-paid price + tariff + consumption tax (if any)
The VAT rate is generally 17%, while 13% for farm products, foods, chemical fertilizer and books.
Several points should be noted: 1) the composition taxable price of payable VAT of imported products shall contain the paid tax amount, and also the consumption tax shall be paid when the products are deemed as taxable consumer goods, like sedan, and therefore the composition price of it shall also include the paid consumption tax. 2) for the VAT calculation of the import process, no tax paid out of China could be reduced. 3) the VAT levied by the custom house in the process of import could be reduced as the input tax, when the imported products are not of non-reducible products provided in the Customs Import and Export Tax of PRC.
To sum up, the import tariff and import VAT shall be paid for the imported products, and the consumption tax shall also be paid when it’s within the scope of the taxable articles. The following instances may help you have a more direct understanding on the tax occurred (‘incurred’ instead of ‘occurred’?) in the process of import. Company A from China imports a dispatch of components from USA, which costs FOB RMB 5 million, and the packaging fee, transportation fee, insurance premium and labor fee totaled before unlading is RMB 500, 000. The official import tax rate is 20%, then how much tariff and VAT shall be paid by the exporting company?
(1) Tariff:
Duty-paid price of tariff=5 million ＋500, 000=5.5 million
Payable tariff=5.5 million×20％=1.1 million
(2) Import VAT
VAT= (5.5 million+1.1 million) ×17％=1.122 million
The import and export company shall pay tariff and VAT totaled RMB 2.222 million. If the device manufacture company plans to import the components and assemble them as installed equipment, and subsequently export the equipment for sale, the company may import the components through a processing trade way, and therefore the aforesaid tax of RMB 2.222 million could be exempted.
II. Bonded processing trade
The tariff and VAT shall be paid in the process of products import, and the import of the products may enjoy the treatment of tax refunding, which is to repay the collected VAT back to the tax payer by a certain proportion. Yet, with regards to the raw materials and components import from overseas, the bond system could be applied. The system means that any import of a product shall be approved by the custom house, and to store, process, assemble the imported articles under the supervision of the custom house when the import taxes and fees are suspended. And after that, when exporting, the taxes and fees for the first import could be exempted, while such taxes and fees shall be levied once no such an export is conducted.
What advantages does the bond system have compared with tax refunding? If the tax refunding could be applied, the import tax and VAT shall be paid first when importing, and afterwards the tax refunding could be enjoyed for the export, whereby the first paid import tax could not be refunded and the VAT paid in import process will be paid back by the refund rate instead of the full amount. Therefore, the company shall take the un-refunded tax. Furthermore, the application of the tax refund system is preconditioned with the payment of import taxes, which also occupies the capital of the company. In comparison, the bonded products are stored, manufactured and assembled with no tax paid simultaneously, and that could reduce the cost and make the product more competitive.
Surely, the bonded imported components could not be sold in the domestic market, and the custom house would conduct a whole course censorship from the import of the bonded products to the export or domestic sale with taxes made up. And such censorship including :1) the company shall apply for the record to the local economic trading department after signing the OEM contracts, and take the Permit on OEM Contracts; 2) the company shall also record their contracts in the custom house, and get the Registration Manual of OEM thereby; 3) the custom house manages the companies and products in classes, and demands in general the company to establish an OEM Bank Deposit Account, to which a tax paid by 50% of all duties payable to the material import is necessary. Yet, to Company A and B no taxes are necessary in addition to the account setting up; 4) when recording the contracts, the custom house will also determine the unit consumption of the raw material, and moreover the custom house may do an inspection of the factory in the performance of the contracts; 5) the company handles the clearance procedures of import and export with the manual issued by the administration as said afore; 6) after the custom house procedures, like the re-export after OEM or domestic sales, the company shall also submit the certificates or papers to the custom house and apply for the cancellation of the supervision by the custom house. Once the application is verified, the taxes paid shall be reduced.
III. Special supervised areas of the custom house
As said before, the bonded approval procedure of material import of OEC trading shall be conducted by each contract signed, which brings a complicated supervision by the custom house. When the company’s business is not limited to the aforesaid bonded ORM or it does not plan to record each installment of the products, then to set up a company or to entrust other companies to handle bonded manufacture, international transfer, bonded storage or logistic distribution may be its option. For example, Company A, which provides imported electron components to others, may choose to set up a distribution center in the bonded area, and the center may import the components with taxes remained, the equipment to be used by the company, export the manufactured components or sell to the domestic market after paying the duties. Although its sales in China are with tax payment for import, the tax payment delay could also be fulfilled.
The special supervised area by the custom house includes the bonded area, export proceeding zone, bonded logistic park and bonded port. They have different functions, like the product transferred to logistic park or bonded port is deemed as export, and the companies registered outside the park may apply for the tax refund with the paper issued by the custom house. Thus, the shuffling between mainland and China of the made-in-China products could cease.
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