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back to index backASIAtalk April,  2005

China: Value Added Tax Planning – How To reduce export costs by using Bonded Logistic Zones

Bonded Logistic Zones (BLZs) have made it possible for enterprises engaged in export processing trade (including direct and indirect exports) to reduce their transaction costs.

Due to the difference between the Value Added Tax (VAT) rate and the export refund rate, irrecoverable input VAT has become a serious burden for export-oriented enterprises. In some cases, these export costs can amount to 4% of the export value. On the other hand, production enterprises that export via VAT-exempt factory transfer arrangements may also bear significant irrecoverable input VAT costs.

Before BLZs were established, some foreign investment enterprises (FIE) would first export goods (primarily through Hong Kong) and then directly re-import them back into the PRC in an effort to fulfilling their business needs. However, this process entailed high logistics costs and unnecessary wasted time. Today, FIEs can also utilize logistic zones to facilitate this or reduce their costs.

Policy Background

BLZs are a type of special administrative zone distinct from Export Processing Zones (EPZs). Currently, BLZs in China are mainly established in the port areas near Free Trade Zones (FTZs), thereby facilitating the cooperation of FTZs and the ports for mutual benefits (Zone-Port Cooperation”).

The Waigaoqiao Bonded Logistic Park (WGQ BLP), China's premier trial BLZ, was established in 2004. Various other trial BLZs have sprung up in Qingdao, Ningbo, Dalian, Zhangjiagang, Xiamen Xiangyu, Shenzhen Yantian port, Tianjin and in the vicinity of other FTZs. The Suzhou Industrial Park Customs Bonded Logistic Centre was the only zone approved by the Customs General Administration in the PRC but not established in a port zone.

The establishment of FTZs in the 1990s played a crucial role in accelerating the economic growth of China's outbound economy. The primary advantages of using this original style of FTZs were that goods within the free trade area received bonded status (under Customs' supervision) and could be freely traded internationally. In recent years, however, the opening of other special zones, the liberalization of trade and services and an overall reduction in tariffs have comparatively reduced the benefits of using the original FTZs. The Chinese government has, therefore, reached a consensus to build genuine FTZs that are more in line with international standards.

In view of the above, the Chinese government has decided to enact necessary structural reforms to ensure the successful development of these newer FTZs. The above-mentioned trial allied zones and logistic trial zones are the first step toward building a free trade environment.

How to Reduce Export Costs by Using BLZs

Varying slightly according to the specific nature of an enterprise, VAT planning can be illustrated in a simplified model as indicated in the diagrams below. Irrecoverable input VAT (i.e. input VAT that cannot be credited and must be transferred out as a cost) of 4% (100 x (17% - 13%)) of the export value would be incurred upon direct exportation of goods by the production-oriented enterprise. To ease the VAT burden, arrangements can be made for the PRC domestic supplier to make use of the BLZ and reimport raw materials from the BLZ.

For PRC export-oriented enterprises, goods entering the BLZ would be considered exports and thus be entitled to a VAT refund. In the example, the reduced irrecoverable input VAT would equal 2.4% (i.e. 60 x (17% - 13%)) of the original export value, thus enabling an enterprise to reduce overall operating costs of 1.6% of the original export value. It should be emphasized, however, that the applicability of this structure will vary according to different local practices and for enterprises that conduct different types of transactions with different types of cost structures.

The example demonstrates how export-oriented enterprises (including enterprises in the processing trade and those conducting indirect exports) can take steps to improve their transaction models and reduce operating costs through use of BLZs. Based on our experience, the above model may lead to substantial cost savings for enterprises that conduct the following activities:

•  Export a majority of goods with substantial value added production processes carried out in China

•  Purchase a substantial amount of domestic raw materials/parts,

•  Have significant discrepancies between their VAT rate and refund rate; and

•  Have a large proportion of factory transfer sales.

For the rest of this article, please click here.

Source: Deloitte China- GAI

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