China: Domestic Taxation
Import and Export Taxation
Evidently, China's membership of the World Trade Orgainzation since 2005 has made for plenty of changes to its import/export taxation regime. But there remains plenty of scope for dissension, and not all cases have gone against China.
In September, 2009, United States Trade Representative Ron Kirk welcomed China’s decision to amend a law which imposes tariffs on imported auto parts for use in the manufacture of cars.
According to Kirk, US officials had been informed by the Chinese government that the charges had been eliminated as of September 1.
China's announcement came after the World Trade Organization (WTO) agreed with the United States and the European Union that these charges were contrary to WTO rules.
Commenting on China’s decision, Kirk stated that: "We are pleased that China has informed us that it is eliminating the additional charges on imported auto parts in response to the WTO ruling. Ending these charges will help ensure a level playing field for the high quality auto parts made in America, and is an important example of the importance of enforcing our international trade agreement rights."
Kirk warned, however, that the US government will be “carefully reviewing” the changes.
The WTO Appellate Body confirmed in December, 2008, that China had breached its WTO obligations by creating a system for the registration and taxation of imported car parts that promoted the use of domestic components over imported car parts.
Under China’s system of tariffs, introduced as part of the 'New Automobile Policy' in 2004, if imported parts assembled in a specific model exceeded a certain threshold, an additional charge of 15% was imposed on top of the normal 10% customs duty.
The additional charge was easily triggered, either by a specific combination of even a few imported parts, or if the imported parts represented 60% or more of the price of the final vehicle.
In July 2008, a WTO Panel found that this system was in breach of the General Agreement on Tariffs and Trade (GATT) Article III, which does not allow internal fiscal and regulatory measures to discriminate against imported products in favour of domestic products.
The Panel additionally concluded that, even if the charges were to be classified as customs measures rather than internal measures, they would still breach GATT Article II, by imposing a customs duty higher than the one agreed to by China when it joined the WTO.
China appealed the Panel's conclusion before the WTO Appellate Body in September 2008, but the Appellate Body's final report largely confirmed the Panel's conclusions.
In December, 2009, China announced increases on import tariffs for fuel oil and jet fuels, commencing 2010. Both tariffs were increased by 1%, to 3% for fuel oils, and to 6% for jet fuels. The change does not, however, affect tariffs on diesel and gasoline, the tariff for which remain at 1%; this tariff was introduced in 2008, reduced from 5-6%.
As part of its agreement with the World Trade Organization (WTO), China is also reducing tariffs on other imports starting 2010. Tariffs on imported indium are being reduced to 5% (from between 10% and 15%), and are being reduced by 23-38% on imported rubber. There will be further tariff reductions on over 600 other products, including phosphate ore, coal and naphtha. Consequently, tariffs on industrial products are to fall on average to around 8.9%, and on agricultural products to around an average of 15.2%.
The increase in fuel tariffs aims to reduce energy consumption and help combat pollution in China.
One peculiar feature of China's taxation system is the existence of export rebates, effectively making up for deficiencies in the VAT syste.
In December, 2009, China’s Ministry of Commerce announced that it would maintain export tax rebates into 2010, in the light of continuing trading challenges due to the economic crisis.
Exports from China fell by 1.2% in November. Warning against “blind optimism,” the Ministry revealed that it believes that continued intervention is necessary to aid economic recovery. Government figures show that imports, meanwhile, had increased by 26.7%.
Since the start of the economic crisis, China had raised export tax rebates seven times, eliminated export tariffs on a number of goods, and provided USD84m in short-term export credit insurance.
China has also announced that it is to work towards increasing imports, particularly high-tech goods and sources that are scarce in China.
Furthermore, Commerce Minister Chen Deming announced that the Ministry would, in 2010, aim to open new markets for foreign trade and increase domestic consumption, including increased subsidies for car scrappage schemes, establishing an e-payment system for rural communities, offering further financial aid to businesses (particularly small and medium-sized enterprises), and encouraging the development of e-business ventures.
In April, 2010, however, a US government trade report found that uneven application of value-added tax (VAT) in China continued in 2009 in contravention of world trade rules.
Despite a 2007 Chinese agreement to settle a World Trade Organization (WTO) dispute on prohibited tax subsidies, which was supposed to eliminate VAT and income tax refunds tied to the purchase of domestic products over imported products, the 2010 National Trade Estimate Report found that China had increased VAT rebates on certain exports, and continued to exempt domestic enterprises from any import tax and VAT for imports of designated key parts and raw materials.
"Importers from a wide range of sectors report that, because taxes on imported goods are reliably collected at the border, they are sometimes subject to application of a VAT that their domestic competitors often fail to pay," stated the report, adding that: "In addition, China’s selective exemption of certain fertilizer products from the VAT has operated to the disadvantage of imports from the United States."
According to the report, China retained an "active VAT rebate program for exports," and Beijing had increased export VAT rebates on many products seven times since July 2008.
"In October 2008, China announced VAT rebate increases on 3,486 products including textiles, toys, garments, furniture, and some high-value added electrical machinery, representing approximately one quarter of China’s total exports," the report stated.
Chinese VAT ranges from 5% to 17% depending on the product, and is China's single most important revenue source.
The report also criticized China’s 1993 consumption tax system because a "substantially different" tax base is used to compute consumption taxes for domestic and imported products. "The tax burden imposed on imported consumer goods ranging from alcoholic beverages to cosmetics to automobiles is higher than for competing domestic products," the report claimed.
The June, 2010, decision to abolish tax rebates to commodity exporters ended what the US considered ‘unfair subsidies’, though the effects on Chinese steel producers could be serious. The removal of the rebates, which amounted to 9% for steel production, were effective from July 15, 2010 and affected the production of hot rolled steel, coil, some narrow cold-rolled coil products and hot-dipped galvanized coil. China also announced the removal of 5% rebates for the production of starch, ethanol and copper products, including bars, wires and some nickel products. China is the world’s biggest producer of many base metals and also one of the world’s biggest consumers.
The move is also intended to reduce output for export because of the huge internal demand in China for base metal production, as well as easing trade tensions between China and in particular, the US. China’s steel exporters have already fallen foul of anti-dumping measures imposed by the US government, partly because of the tax rebates which it regards as unfair.
In August, 2010, Chinese vice-minister of commerce, Jiang Yaoping, announced that export tax rebates would be cut on certain products with the aim of restricting the export of "high-pollution, high-energy consumption and resource-dependent" products and accomplishing energy and emission reduction targets for the five-year plan period (2006-2010).
"We may make adjustments to some energy-consuming products in line with our energy-saving strategy, but the scope of the adjustment will be small," Jiang said.
China removed export tax rebates on 406 items effective from July 15, 2010, including certain steel products, non-ferrous processed metal products, silver powder, alcohol, corn starch, crop protection products, medicine, chemicals, plastic products, rubber and related products. The tax rebate rates on these items ranged from 5% to 17%.