Import Regulations in China
Calculating taxes and duties for import
Importing goods to China implicate three types of taxes – customs duties, value-added tax (VAT), and consumption tax (CT) – depending on the nature of the imported good and whether it falls under CT specified categories.
The amount of import tax liability and who is ultimately responsible for paying them generally depends on how the sales contract is concluded between buyer and seller.
Terminology of import taxes
The International Chamber of Commerce’s (ICC) international commercial terms is the most commonly used terminology for expressing pricing or risk-related issues associated with goods transit. The most commonly used when signing a contract are:
- CIF (cost, insurance, and freight) – meaning that the seller is responsible for the cost of freight and insurance to facilitate the safe delivery of the goods to the port of destination; and,
- FOB (free on board) – meaning that the buyer is responsible for the above expenses.
The amount of import tax and customs duties payable are calculated based on the price or value of the imported goods, which is called duty paying value (DPV) and is determined based on the transacted price of the goods. This includes transportation-related expenses and insurance premiums on the goods prior to unloading at the port of arrival in China. Taxes, such as VAT or CT, are not included in the determination of the DPV. Another notable term is composite assessable price (CAP), which is a combination of DPV, import duty, and CT if applicable.
The following formulae show how DPV and CAP are calculated:
- DPV = Cost of goods + Transportation cost + Cargo insurance
- Import duty = DPV x Tariff rate
- CAP = DPV + Import duty = DPV x (1+tariff rate)
- VAT = CAP x VAT rate
To illustrate, suppose a Chinese company is importing machinery from a European company and has signed a contract according to FOB pricing. Therefore, all the shipping and insurance costs would be borne by the Chinese buyer.
This means that the European company’s primary responsibility is to load the machinery (goods) onto the ship arranged by the Chinese buyer and clear the goods at customs ready for export. In this case, the following expenses need to be considered:
- Cost of the machinery: US$1,000,000
- Freight: US$30,000
- Insurance premium: US$4,000
- Import tariff rate: 10%
- Import VAT rate for machinery: 17%
- Port handling: US$3,000
- VAT rate for port handling service: 6%
- Import duty and VAT:
- DPV = 1,000,000 + 30,000 + 4,000 = US$1,034,000
- Import duty = 1,034,000 x 10% = US$103,400
- CAP = 1,034,000 x (1+10%) = US$1,137,400
- VAT = 1,137,400 x 17% = US$193,358
- Port handling VAT = 3,000 x 6% = US$180
Under the FOB agreement, the import VAT (17%) and VAT levied on the service for port handling (6%) would both be borne by the Chinese buyer.
The only possible way to reduce the import VAT liability for the imported goods would be to negotiate a lower transportation cost and insurance premium with the nominated freight forwarder and insurance company so as to reduce the CAP value and therefore import VAT. However, if the buyer is classified as a general VAT taxpayer, VAT paid for imported goods would be able to offset output VAT, potentially reducing their total tax burden.
In addition to this, there are certain items exempt from import VAT:
- Imported instruments and equipment to be used directly in scientific research, scientific experiments, or education;
- Imported materials and equipment donated as non-reimbursable assistance by foreign governments or international organizations; and
- Articles directly imported by organizations for special use by the disabled.
Lower tariff rates on consumer goods
Effective since July 1, 2018, China has substantially lowered tariffs on goods such as apparel, cosmetics, cleaning products, home appliances, fitness products, and some healthcare products. In total, tariffs on 1,449 categories of goods will be lowered.
Significant changes include import reductions on:
- Apparel (including clothes, shoes, and hats), kitchenware, and fitness products from an average of 15.9% to 7.1%;
- Aquaculture products (including fishing products) and mineral water from an average of 15.5% to 6.9%;
- Cleaning products, cosmetics, and some healthcare products from an average of 8.4% to 2.9%;
- Household appliances (including washing machines and refrigerators) from an average of 20.5% to 8%;
- Various types of fruit and vegetable juices from 10-30% to 5%; and
- Some types of jewellery from 35% to 10%.
The complete list of tariff reductions can be found here (in Chinese).
The move is reminiscent of the December 2017 round of tariff cuts on nearly 200 types of consumer goods. Those tariff cuts also affected widely-used consumer products such as milk powder, diapers, cosmetics, and other household goods.
Business models for import
There are several different approaches that foreign companies can take when importing from or exporting to China. Not all of these require the foreign investor to set up an entity in China. Depending on one’s situation, certain approaches work better than others. In our 2013 magazine Sourcing from China, we discuss the different models available when importing from China. This section will discuss some of the options a company that exports products to China might want to use.
Agents and distributors
Small to medium-sized companies often rely on either agents or distributors when selling their products in China. While in both cases, the foreign company itself does not need to have a presence in China, there are differences between the two approaches.
An agent typically finds customers in China for the foreign company in return for a commission on sales. It does not own the goods. A distributor, however, purchases the goods from the foreign supplier and sells them in China on its own account. Having a distributor means that the foreign company can be less involved in the process and bear less risk, but at the same time, it has to shed some control as well, such as in the marketing, branding and pricing of the products.
Setting up a company in China
There are various reasons why a foreign company will want to set up a subsidiary in China when exporting its goods to the country. Without having an entity in China, the foreign company will be unable to hire staff. It will also be unable to issue VAT invoices to Chinese customers, or directly take payment in and convert RMB. With the entity selling the products under its own name, it can set the price itself. If the foreign company has personnel on the ground in China, it can establish firmer control over matters such as intellectual property protection, communication between customers and the foreign headquarters, logistics and quality control.
This would, however, require a far larger upfront investment, and would be more costly and time-consuming than going through an agent or distributor. Setting up a company in China takes several months and results in a higher tax burden. Foreign firms additionally need to consider how to repatriate profit and stay in compliance with China’s laws and regulations.
Licenses required for import and export
Several licenses are required when setting up a company for import and export. Some of these need to be applied for during the incorporation process. The trading of certain goods requires a license, such as food, drugs or medical devices. When this type of business is included in the company’s business scope and business license, the investor will often need to get the product specific license first, before being granted the business license.
After the company is set up, it needs to apply for an import/export license. The procedure is as follows:
- Apply for foreign trade operator filing with the local branch of the Ministry of Commerce;
- Register with customs;
- Registration and record-filing with the China Inspection and Quarantine Bureau;
- Register with e-port;
- Foreign currency exchange registration with the local branch of the State Administration of Foreign Exchange.
If the company is trading goods that are subject to a quota – as mentioned in the first article – it will need to apply for a separate license for each individual batch of goods as well.
There are three categories for imports: prohibited, restricted and permitted. Certain goods that are deemed harmful, like weapons, toxics, and diseased animals or plants, are banned from import.
Other products are restricted due to its low-value add. Restricted items include raw materials for plastics, cotton yarn and cotton cloth, raw materials for chemical fibres and more. Importers can refer to the Ministry of Commerce (MOFCOM) website for fuller details, or they can refer to the China General Administration of Customs website.
China Compulsory Certification (CCC)
The China Compulsory Certification (CCC) mark is a compulsory safety mark for domestically-manufactured and imported products listed in the CCC product catalogue, approved and jointly released by the General Administration for Quality Supervision and Inspection and Quarantine (GAQSIQ) and the Certification and Accreditation Administration (CNCA). CCC was implemented on May 1, 2002 and became fully effective on August 1, 2003. The CCC mark is administered by CNCA, which designates the China Quality Certification Centre (CQC) to process CCC mark applications. The CCC Product Catalogue includes electric appliances, vehicles, safety glasses, medical equipment and toys, etc.
GAQSIQ is an administrative department directly under the State Council. It is in charge of quality supervision, inspection, animal and plant quarantine, and food safety for all goods transported across the Chinese border. It also supervises the CNCA and the Standardization Administration of China (SAC), as well as Entry-Exit Inspection and Quarantine Bureaus throughout China.
CNCA is responsible for legislating inspection and quarantine standards and relevant regulations. CQC is a professional certification body under the China Certification & Inspection (Group) Co., Ltd. (CCIC). CCIC was originally established with accreditation by GAQSIQ, CNCA, and the National Accreditation Service for Conformity Assessment of China but is now an independent enterprise. It is China’s largest international enterprise providing inspection, authentication, certification, and product testing services worldwide with regard to the quality, safety, health, and environmental protection aspects of products. It has approximately 300 offices and 200 testing laboratories located at major ports, cities and trade centres in more than 20 countries and regions.
Certificates issued by CCIC based on their inspection and testing are accepted and sometimes required by government authorities. For example, when selling waste products to China, CCIC’s inspection prior to loading them onto the ship is mandatory. The GAQSIQ offices at the ports of China will only accept inspection and quarantine applications after the CCIC certificate has been issued. CCIC also provides services in sectors such as chemical products, agricultural products, industrial products, consumer products, food and automobile.
As an entity under the CCIC, CQC’s core functions include CCC, voluntary certification and management system certification. It is also a third-party certification body authorized by the State to certify energy saving, water saving and environmental-friendly products.
The CCC certification process usually takes between four to eight months. A designated test laboratory in China will test product samples and CQC will send representatives to inspect the manufacturing facilities. CCC certificates are valid for five years from the original date of issuance. The CCC certificate and permission of printing the CCC mark must be renewed annually as part of a follow-up certification, which involves a one-day factory audit.
To clarify if a product must be certified, it is also helpful to look at the Guobiao (Chinese for a national standard, GB) standards for the product. GB standards are the basis for the testing which products must undergo during the CCC certification. GB standards are national standards issued by the SAC. Mandatory standards are prefixed “GB”, while voluntary standards are prefixed “GB/T”. They are followed by a standard number. SAC maintains a database of all GB Standards, which is searchable in English or Mandarin. Standards can be searched using various criteria such as standard number, standard title, ICS code, date of issuance, or relevant technical committee.
Some products listed in the CCC Product Catalogue, such as those that are used for scientific purposes and product testing or those that are displayed at trade fairs, may be imported without a CCC certificate.
China’s law on import and export commodity inspection requires that all imported goods listed in the catalogue of import and export commodities inspected by Entry-Exit Inspection and Quarantine Institutions, which is generally updated every year, to be equipped with a China Inspection and Quarantine (CIQ) certificate for them to be permissible for use and sales in China.
The CIQ Certificate has been one of the essential certifications for exporting to China since 2000.
The consignee or agent should apply for the inspection with the inspection bureau located at the place of Customs declaration. Registered agencies at inspection authorities can be hired to help process the inspection declaration by proxy. The Customs will release the imported commodities only after verifying the CIQ certification.
The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information.
Content on this page is provided by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.
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