Publishing an article on “reducing the influence of processing trade policy on enterprises” upon the invitation of “Whenever” magazine (January issue)

He Li, director of the Department of Processing Trade & Bonded Affairs Control and Supervision of General Administration of Customs, recently told the press that a series of processing trade policies recently issued by the Chinese government is just the first step of macro control, and that a new “Catalogue of Restricted Commodities in Processing Trade” to be issued late this year or early next year, will restrict over 1,000 kinds of commodities. Most importantly, the catalogue will also stipulate that processing enterprises outside the export processing zones will not enjoy bonded preference policies. As Guangdong has only two bonded areas: Guangzhou and Shenzhen, about 20% processing enterprises will no longer enjoy tax discounts.

How should the management of enterprises respond to the impacts of existing and future policies on enterprises? In terms of processing modes, the processing trade is classified into processing of imported materials and processing of supplied materials. The products manufactured 100% from imported materials by way of processing trade must be exported, while the products manufactured from imported materials by way of common trade are not subject to restrictions on domestic and overseas sales. Besides, the raw materials of processing trade projects covered in the catalogue can only be imported by way of common trade (import duty and value added tax must be paid), or be purchased in China, which will surely increase the purchasing costs of raw materials. As well, the processing enterprises of supplied materials can only operate within the range of the processing contract due to the lack of legal person status, and therefore are not qualified to independently import raw materials by way of common trade or purchase them in China. In addition, in case the related raw materials of the processing enterprises of supplied materials are covered in the catalogue, the original processing contracts will not be renewed upon expiry.

In that light, many enterprises are beginning to import materials by way of common trade rather than by way of processing trade, and former processing enterprises of supplied materials are being transformed into wholly foreign funded enterprises. In this way, the enterprises do not bear increasing operating costs and will not close down due to new policies, while increasing their profitability by the added domestic sales markets.

Conpak CPA Limited, with years’ experience in cooperating with Japanese enterprises, is familiar with tax and customs rules of China. We will keep track of new policies and analyze their far-reaching impacts on enterprises in the hope of facilitating business development of Japanese enterprises in China through our services.

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