In order to further improve foreign exchange services and administration for commodity trade, on 27 June 2012, the State Administration of Foreign Exchange (SAFE), the General Administration of Customs (GAC) and the SAT jointly released SAFE Announcement `2012` No. 1 (“Announcement 1”) launching the nationwide reform of the foreign exchange administration system for commodity trade starting from 1 August 2012, adjusting the export declaration protocol and upgrading the export foreign exchange collection and information sharing mechanism.
To further implement the above reform, on the same date, i.e., 27 June 2012, the SAFE issued Huifa `2012` No. 38 (“Circular 38”) promulgating the following four regulations related to foreign exchange administration of commodity trade which will come into effect on 1 August 2012.
- Guidelines for Foreign Exchange Administration of Commodity Trade (“the Guidelines”)
- Implementation rules of the Guidelines
- Procedural Guidelines for the Guidelines (bank & enterprise version)
- Administrative Regulations on Reporting Foreign Exchange Payment and Collection Information for Commodity Trade
Key features of Announcement 1 and Circular 38 are as follows:
Reform of the mode of foreign exchange administration of the commodity trade
Starting from 1 August 2012, the verification form for export foreign exchange collection (出口收汇核销单) (“the verification form”) will be cancelled. Enterprises would no longer need to go through the verification procedures of export foreign exchange collection at that time. The mode of foreign exchange administration of the commodity trade shall be transformed from on-site verification of each foreign exchange payment to overall off-site inspection.
The local bureaus of the SAFE shall collect the data of each import and export transaction and each foreign exchange payment and collection, verify and match the commodity flow with the capital flow so as to facilitate the foreign exchange payment and collection for the compliant commodity trade. Enterprises found with abnormal transactions may be subject to intensive supervision and on-site inspection, if necessary.
Enforcement of comprehensive supervision
Enterprises shall be classified into types A, B and C according to their level of compliance with foreign exchange rules and the results of on-site and off-site inspection. The foreign exchange authorities shall perform comprehensive adjustments to the above classification from time to time according to the compliance status of the enterprises. The supervision period for types B and C enterprises shall be one year.
During the validity period of supervision, enterprises under type A shall be granted various favorable treatments, e.g., foreign exchange can be directly remitted through the banks supported by the declarations for importation of goods (进口报关单), or contracts, or invoices, which can substantiate the authenticity of the transactions; foreign exchange collection shall not be subject to network inspection. While, type B and C enterprises shall be subject to stricter supervision in terms of review of documents of foreign exchange payment and collection, types of applicable businesses, mode of settlement, etc. For the foreign exchange payment and collection of type B enterprises, the banks shall conduct inspection on electronic data; while each foreign exchange payment and collection of type C enterprises has to be registered with the foreign exchange authorities before being processed.
Adjustment to the export declaration protocol and simplified certification for export tax refund
For exportation of goods on or after 1 August 2012 (such date shall be the date of exportation shown on the customs declaration for exportation of goods (出口货物报关单 for export tax refund purposes)), the verification form shall no longer be required for export declaration. The tax bureaus shall review and approve the export tax refund with reference to the foreign exchange payment and collection information and classification status provided by the foreign exchange authorities.
For exportation of goods before 1 August 2012, the above favorable treatments shall still be applied provided that, as of 31 July 2012, the verification period for export foreign exchange collection has not expired and the verification has not yet been performed.
As the foreign exchange authorities will no longer issue the verification forms starting from 1 August 2012, for the exportation of goods on or before 31 July 2012 and the verification period for export foreign exchange collection will be expired on 1 August 2012, the enterprises should apply for the verification of export foreign exchange collection on or before 31 July 2012; otherwise, the foreign exchange authorities shall issue relevant certification on a case by case basis in accordance with previous foreign exchange rules.
Cooperation among the different authorities
The SAFE, the SAT and the GAC shall work closely on information sharing, improving coordination to crack down on illegal cross-border capital flow, smuggling and tax fraud. Announcement 1 supersedes a series of circulars related to foreign exchange payment and collection for commodity trade with the details listed as an appendix.
The core contents of the new foreign exchange administration system for the commodity trade under Announcement 1 and Circular 38 are overall off-site inspection, comprehensive supervision and administration. The implementation of this system will play an important role in the current and future development of China’s foreign trade. Major effects brought about by Announcement 1 and Circular 38 may include:
- Facilitating and improving the efficiency of foreign exchange payment and collection for the commodity trade
- Improving the foreign exchange administration level
- Reducing the administration cost of the enterprises, financial institutions and government authorities
- Strengthening the risk management of foreign exchange payment and collection for the commodity trade
Enterprises engaging in foreign trade should read Announcement 1 and Circular 38 carefully and become familiar with the relevant provisions and understand how their daily operations will be affected. If in doubt, consultations with tax professionals are always recommended.