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S P E C I A L E C O N O M I C A R E A S O F C H I N A A N D W T O – W I L L T H E P R I V I L E G E S S U R V I V E ? W E N G E R V I E L I B E L S E R B E I J I N G O F F I C E

October 2003

Report on Special Economic Areas of China:

This report is based on information available on the internet.

Wenger Vieli Belser accepts no responsibility for accuracy or

truthfulness of content of this report. The purpose of this report

is to provide general information about special economic areas of

China. In no case does Wenger Vieli Belser intend to provide legal

service for any purpose through this report.

I. Survey of Special Economic Areas in China 2 1. General Glance of SEAs 2 2. Economic and Technical Development Zone (ETDZ) 4 3. Bonded Zone (BZ) 4 4. Export Processing Zone (EPZ) 5 5. High Technology Industrial Development Zone (HTIDZ) 6 6. Comparative Study of Preferential Policies 7 7. Conclusion 8

II. Survival of Preferential Policies Applied to SEAs 8 1. WTO Rules 8 2. Sustainability of Preferential Policies 10 3. Conclusion 12

III. Appendix 13

WENGER VIELI BELSER 2

The term “Special Economic Areas” (SEAs) is used by WTO to describe areas to which special economic policies

apply. In China, these areas include five Special Economic Zones (SEZs) 1, fourteen open costal cities, 2 six open

cities along the Yangtze River 3 , twenty one provincial capital cities, 4 five national minority autonomous re-

gions, 5 fourteen boundary economic cooperation areas, 6 fifty six national economic and technical development

zones, 7 thirteen bonded zones, thirty eight export processing zones 8 and fifty seven high technology industrial

development zones.9

However, for the purpose of this report, the term special economic areas refer to economic

and technical development zones, bonded zones, export processing zones and high technology

industrial development zones.

This report is divided into three parts. The first part contains a survey of special economic areas of China featu-

ring their preferential policies. The second part addresses the concern of whether these preferential policies may

survive the WTO test. The last part is compilation of useful directive information and laws and regulations on

this topic.

I . S U R V E Y O F S P E C I A L E C O N O M I C A R E A S I N C H I N A

1. General Glance of SEAs

As the aforesaid indication, Special Economic Areas (SEAs) for the purpose of this report refer to four categories:

economic and technical development zone (“经济技术开发区”), export processing zone (“出口加工区”),

bonded zone (“保税区”) and high technology industrial development zone (“高新技术产业开发区”).

Of these categories, the senior one is economic and technical zone, which dates back to the end of 1984. The

adult ones are bonded zone and high technology industrial development zone, which are products of 1990s.

The nascent one is export processing zone, which is not shaped until the beginning of new millennium.

1 Shenzhen (Guangdong province), Zhuhai (Guangdong Province), Shantou (Guangdong Province), Amoy or Xiamen (Fujian Province) and Hainan Province. 2 Dalian (Liaoning Province), Qin Huangdao (Hebei Province), Tianjin, Yantai (Shandong Province), Qingdao( Shandong Province), Lian Yungang (Jiangsu Province), Nantong (Jiangsu Province), Shanghai, Ningbo (Zhejiang Province), Wenzhou( Zhejiang Province), Fuzhou( Fujian Province), Guangzhou( Guangdong Province), Zhanjiang( Guangdong Province), Beihai (Guangdong Province). 3 Chongqing, Wuhan (Hubei Province), Jiujiang (Jiangxi Province), Wuhu (Anhui Province), Yueyang (Hunan Province), Yichang (Hubei Province). 4 Provincial capital cities excluding the open costal cities of Guangzhou (Guangdong Province) and Fuzhou (Fujian Province). An exclusive list of provinces and their capitals is available at <www.people.com.cn>. 5 Tibet Autonomous Region, Xinjiang Uygur Autonomous Region ,Inner Mongolia Autonomous Region, Ningxia Hui Autonomous Region, Guangxi Zhuang Autonomous Region. 6 An exhaustive list is available at <www.cadz.org.cn>. 7 Ibid. 8 Ibid. 9 Ibid.


Different from special administrative regions such as Hong Kong and Macao, which adopt special political,

economic and cultural policies sharply contrasting with the Mainland, the SEAs are special in terms of economic

policies. In a word, preferential policies are extended to foreigners investing in these areas with a view to

attract direct foreign investment. The preferential policies approved by the central government applicable to the

SEAs may be roughly understood from several aspects, although they vary, sometimes even significantly, based

on specific category of SEA to which they are attached:

Tariff emption is the first pillar of preferential policies, which mainly apply to bonded zones and export proc-

essing zones. For example, equipments and materials imported by enterprise seating in such areas for the pur-

pose of production, construction and management are exempted from duties and value added tax (VAT).

Rebated corporate income tax rate is the second pillar of preferential policies. The corporate income tax

rate applied to economic and technical development zones, high technology development zones, bonded zones

and export processing zones is set at 15% for production enterprises, which is much lower than the ordinary

rate of 30% applied to elsewhere in China. Moreover, the enterprises are exempted from corporate income tax

for 2 years commencing from the year of starting to profit and enjoy a three-year-period of 50% tax rebate

thereafter.

Exemption of value added tax (VAT) is the third pillar of preferential policies. For example, products pro-

duced and sold within bonded zones and export processing zones are free from VAT.

Simplified administrative procedure is the fourth pillar of preferential policies. Firstly, Administrative

Committee of SEAs exercises the administrative approval power in respect of foreign investment that is other-

wise exercised by provincial governments. They are authorized to examine and approve foreign investment no

more than USD 30 million. Secondly, many SEAs adopt “One Step” procedure for foreign investment. Under

that procedure, various government agencies related to approval and registration of foreign investment, inclu-

ding Administrative Committee, customs office, bureau of commerce and industry, administration of foreign

exchange, administration of taxation, and etc., are arranged to work in the same hall with a view to facilitate

approval and registration procedure.

Low investment cost is the fifth pillar of preferential policies. Many SEAs offer lower expenses for land use

right and other public facilities. Some even offer tax refund to cover part of investment cost.

Apart from the aforesaid aspects of preferential policies, SEAs are advantageous in terms of developed infra-

structure. Many SEAs promise to provide investors with “9 Access with 1 Level off”, namely convenient ac-

cess to transportation, drainage, reclaimed water, water, gas, electricity, heating, internet, cable TV, and leveled

off land.

Although attractive and rewarded, preferential policies may give rise to controversies following China’s entry

into WTO, as concerns have already been expressed by some member in the process of reviewing China’s ac-


cession application over possible adverse effect of distorting trade and investment. The legality and survival of

these preferential policies will be addressed in the second part of this report after a category-by-category study

of SEAs is made.

2. Economic and Technical Development Zone (ETDZ)

a) Governing Law

Regulation on ETDZ passed by municipal legislature where specific ETDZ locates

b) Advantages of Investment in ETDZ

Corporate Income Tax: 15%

Tax Exemption and Reduction:

(1) 2 Years of Exemption and Three Years of Reduction by Half (7.5%);

(2) Another 3 Years of Reduction by Half for “Enterprises Adopting Advanced Technology (7.5%);

(3) Preferential Tax Rate at 10% for the Year in Which Export Value Exceeding 70%

Local Income Tax: Exemption and Reduction

c) Selected ETDZ

See Chart I Attached to This Report

3. Bonded Zone (BZ)

a) Governing Law

Measures on Customs Supervision and Control over Bonded Zones (“保税区海关监管办法”).

b) Advantages of Investment in BZ






VAT: Free for In-Zone Transaction



Import & Export: Administration by Registration Record System Instead of Approval; No Quota and License

Restrictions

Processing Trade: No Bank Grantee Bond Required

Equipments: Imported Manufacturing Equipments, Constructive and Decorative Materials, and Office Ap-

pliance Exempted from Duties

Imported Processing Materials: Bonded

Market Access: Ahead of China’s WTO Commitment Schedule

Forex: Free to Open Forex Account and Retain Forex

Qualifications for Foreign Trade: Automatic Grant

c) Selected BZ

See Chart I Attached to this Report

4. Export Processing Zone (EPZ)

a) Governing Law

Interim Measures of the Customs of the P.R.C on Supervision and Control of Export Processing Areas

(“中华人民共和国海关对出口加工区监管的暂行办法”).

b) Advantages of Investment in EPZ






VAT: Free for In-Zone Transaction


Tax Refund: Goods From Other Parts of China Treated as Export and Refund Possible



Restrictions

Processing Trade: No Bank Grantee Bond Required

Equipments: Imported Manufacturing Equipments, Constructive and Decorative Materials, and Office Ap-

pliance Exempted from Duties

Forex: Free to Open Forex Account and Retain Forex

c) Selected EPZ

See Chart I Attached to This Report

5. High Technology Industrial Development Zone (HTIDZ)

a) Governing Law

Provisions on Taxation Policies Applied to National High Technology Industrial Development Zone

(“国家高新技术产业开发区税收政策的规定”)

Provisional Rules on Certain Policies Applied to National High Technology Industrial Development Zone

(“国家高新技术开发区若干政策的暂行规定”)

Circular on Certain Preferential Policies of Corporate Income Tax

(“关于企业所得税若干优惠政策的通知”)

State Administration of Taxation Circular on Application of Preferential Taxation Policies to High Technology

Enterprises (“国家税务总局关于高新技术企业如何适用税收优惠政策问题的通知”)

b) Advantages of Investment in HTIDz



(1) 2 Years of Exemption and 3 Years of Reduction by Half (7.5%);


(3) Preferential Tax Rate at 10% for the Year in Which Export Value Exceeding 70%.


c) Selected HTIDZ

See Chart I Attached to This Report.


6. Comparative Study of Preferential Policies

Comparative Study of Preferential Policies

Category ETDZ HTIDZ EPZ BZ

Level National National National National

Rate of Corporate Income Tax

15%

Preferential Arrange-ments of FIE 2 Years of Exemption and Three Years of Reduction by Half (7.5%);

Preferential Arrange-ments of Enterprises Adopting Advanced Technology

Another 3 Years of Reduction by Half for

Preferential Arrange-ments for Export Orien-ted Enterprises

Preferential Tax Rate at 10% for the Year in Which Export Value Exceeding 70%

Duties and Importation VAT for Imported Self-Used Production Equipments and Parts

Exemption Granted for Enterprises Within the Encourage Category

Exemption

Duties and Importation VAT for Imported Office Appliance and Management Equip-ments

No Exemption Exemption

Duties and Importation VAT for Imported Materials

No Exemption Except for Bonded Materials for Processing Trade Exemption

License for Imported Materials, Equipments and Office Appliance Under Processing Trade

No Exemption Except for Encouraged Pro-jects Under Processing Trade Exemption for All Projects Under Processing Trade

Domestic Sale of Products Comprising Bonded Raw Mate-rials

Taxed as Finished Product Taxed as Finished Pro-duct

Taxed upon Imported Raw Materials

VAT Refund for Finished Products Made from Do-mestics

Refund Granted Only if Finished Products Leave Territory of China

Refund Granted After Domestics Enter EPZ

Refund Granted Only if Finished Products Leave

Territory of China

Bank Guarantee Bond Under Processing Trade

Required Not Required


Rate of VAT 17%; 13% for Agriculture

Tax Refund for Re-Investment

40% of Paid Income Tax for the Re-Investment; Totality of Paid Income Tax for

Re-Investment in the Case of Export Oriented Enterprises and Enterprises Adopting Advan-

ced Technology

7. Conclusion

It is evident from the aforesaid explanation that policies at national level applied to specific category of special

economic areas are consistent, as local authorities have no such power as to revise these policies. However,

local policies vary to some extent, though not very greatly. It should be noticed that many local policies are not

available on the websites and may be decided case by case. Hence, the investors are strongly advised to consult

with relevant authorities of specific special economic area for accurate and update information.

Therefore, the decisive factors which should be taken into consideration in deciding place of investment should

be local policies, notably investment cost (fees for land use rights, rent for workshop, fees for public facilities,

and etc.) and development of local infrastructure.

I I . S U R V I V A L O F P R E F E R E N T I A L P O L I C I E S A P P L I E D

T O S E A S

Before coming to analysis of sustainability of existent preferential policies applied to Special Economic Areas, it

is necessary to look through relevant provisions of WTO agreements as well as commitments of China.

1. WTO Rules

The subject matter of this report mainly relate to subsidies, which are regulated by Agreement on Subsidies and

Countervailing Measures (SCM Agreement), and to Agreement on Trade Related Investment Measures (TRIMs

Agreement). Furthermore, relevant paragraphs contained in Report of Working Party on the Accession of China

and Protocol on the Accession of China merit consideration.

Under SCM Agreement, subsidy is defined as financial contribution provided by government or any public body

within territory of a member state conferring benefit. It may take the form of direct transfer of funds or forgoing

revenues.10 Not all the subsidies are forbidden. Only those the obtainment of which is contingent upon export

performance (“export subsidies”) or use of domestic over imported goods (“local content subsidies”) are enjoi-

10 SCM Agreement, Article 1.


ned.11 Other categories of subsidies, although not forbidden, may open to challenges from other members (“ac-

tionable subsidies”). 12

TRIMs Agreement does not veto every incentive measure. Only those contained in the annexed illusive list,

namely, local content requirement, export performance requirement and foreign exchange balance requirement,

are forbidden.13

In response to concerns raised by some members on importation policies applied to SEAs in China, the represen-

tative of China “confirmed that China would strengthen the uniform enforcement of taxes, tariffs and non-tariff

measures on trade between its special economic areas and the other parts of China's customs territory…”. 14

Further, in response to concerns expressed by some members on investment incentives in SEAs, the representa-

tive of China “confirmed that any preferential arrangements provided to foreign invested enterprises located

within the special economic areas would be provided on a non-discriminatory basis…”.15

In the Access Protocol, China makes the following commitment in respect of special economic areas:

China shall apply to imported products, including physically incorporated components, introduced

into the other parts of China's customs territory from the special economic areas, all taxes, charges

and measures affecting imports, including import restrictions and customs and tariff charges, that

are normally applied to imports into the other parts of China's customs territory.

Except as otherwise provided for in this Protocol, in providing preferential arrangements for enter-

prises within such special economic areas, WTO provisions on non-discrimination and national

treatment shall be fully observed. 16

Further, in Annex 5B to the Accession Protocol, China commits itself to phase out by 2000 the subsidies of “the

priority in obtaining loans and foreign exchange based on export performance” and “preferential tariff rate

based on localization rate of automobile production”. However, China does not commit itself to rescind the

subsidies of “preferential policies for the economic and technology development areas”, “preferential policies

for the economic zone of the Pudong area of Shanghai”, “preferential policies for foreign invested enterprises”,

and “preferential income tax rate for high-tech enterprises”, which are contained in Annex 5A of Access Proto-

col and notified to WTO and its members.

Based on the afore-quoted provisions, the WTO rules in respect of special economic areas of

China may be summarized as follows:

11 SCM Agreement, Article 3. 12 SCM Agreement, Part III. 13 TRIMs Agreement, Annex. 14 Working Party Report, Para. 225. 15 Working Party Report, Para.228. 16 Accession Protocol, part I.


(1) Investment incentives including subsidies based on requirements of local content, export performance or

foreign exchange balance, are forbidden;

(2) Importation policies for special economic areas of China shall be brought in line with policies for other parts

of China;

(3) China may sustain preferential arrangements for enterprises within special economic areas and shall ensure

non-discriminatory application of these arrangements;

(4) China is obligatory to notify WTO of any additions or modifications to its special economic areas, including

notification of the laws, regulations and other measures relating thereto.

Apart from these rules specifically targeting SEAs, China’s commitments in more general sense such as tariff

concession should be taken into consideration in judging on the sustainability of preferential policies applied to

SEAs.

2. Sustainability of Preferential Policies

There is no exception for implementation of WTO rules in SEAs of China, as China promises to apply WTO rules

“to the entire customs territory of China, including border trade regions and minority autonomous areas, Speci-

al Economic Zones, open coastal cities, economic and technical development zones and other areas where

special regimes for tariffs, taxes and regulations are established (collectively referred to as "special economic

areas") 17.

Many aspects of preferential policies take the form of tax exemption or reduction, which fall into the scope of

SCM Agreement and hence should be regulated. As the pillar instrument governing investment, TRIMs Agree-

ment shall apply when assessing the legality of preferential policies. Moreover, in this process, WTO rules

should be considered as a whole.

The existent preferential policies applied to SEAs may face 4 choices of disposition. The first choice is loss of

significance following implementation of commitments of China. The second choice is popularization as a result

of progressive market access. The third choice is demise due to inconsistency with WTO rules and commitments

of China. And the last choice is continuous significance.

a) Loss of Significance

Imported Processing Materials: Bonded (Bonded Zone)

Following the accession of China to the WTO, the tariff will be reduced significantly according to conces-

sions made by Chinese government. With the tariff going down, the policy of making imported processing

materials bonded will lose its significance.

17 Accession Protocol, Part I.


Equipments: Imported Manufacturing Equipments, Constructive and Decorative Materials, and Office Appli-

ance Exempted from Duties (Bonded Zone & Export Processing Zone)

The reason is the same for loss of significance of bonded imported materials.

Market Access: Ahead of China’s WTO Commitment Schedule (Bonded Zone)

Following the progressive market access to foreign investment and foreign service providers, this privilege

will not enjoy the significance as it did.

Qualifications for Foreign Trade: Automatic Grant (Bonded Zone)

With China gradually looses its control over qualifications for foreign trade, this privilege will lose its attrac-

tion.

b) Popularization


Restrictions (Bonded Zone & Export Processing Zone)

Considering China’s specific commitment that “China shall apply to imported products, including physically

incorporated components, introduced into the other parts of China's customs territory from the special eco-

nomic areas, all taxes, charges and measures affecting imports, including import restrictions and customs

and tariff charges, that are normally applied to imports into the other parts of China's customs territory” ,

and China’s general commitment of revoking restrictions upon importation, this privilege will be popularized

among other parts of China.

c) Revocation

Preferential Tax Rate at 10% for the Year in Which Export Value Exceeding 70% (All SEAs)

This privilege constitutes subsidies in the sense of SCM agreement. The obtainment of this benefit is contin-

gent upon export performance, which falls into the category of “forbidden subsidies” of that agreement.

Refund of Totality of Paid Income Tax for Re-Investment In Case of Export Oriented Enterprises

The subsidy is contingent upon export performance and hence be forbidden.

d) Continuous Significance

Corporate Income Tax: 15% (All SEAs)


(1)2 Years of Exemption and Three Years of Reduction by Half (7.5%); (All SEAs)

(2) Another 3 Years of Reduction by Half for “Enterprises Adopting Advanced Technology (7.5%); (All SEAs)

VAT: Free for In-Zone Transaction (Bonded Zone & Processing Zone)


Processing Trade: No Bank Grantee Bond Required (Bonded Zone & Processing Zone)

Forex: Free to Open Forex Account and Retain Forex (Bonded Zone & Export Processing Zone)

Local Income Tax: Exemption and Reduction (All SEAs)

3. Conclusion

It is therefore concluded that the absolute majority of existent preferential policies applied to special economic

areas of China may survive the WTO test, as only subsidy contingent upon export performance is forbidden.

However, many of them may lose their significance with the progressive market access as a result of accession

of China to the WTO.


I I I . A P P E N D I X

I. Comprehensive Useful Directive Information

See the Chart II Attached to This Report

II. List of Laws and Regulations Relevant to Special Economic Zones 18

1. Interim Measures of the Customs of the P.R.C on Supervision and Control of Export Processing Areas

(“中华人民共和国海关对出口加工区监管的暂行办法”)

2. Measures on Customs Supervision and Control over Bonded Zones (“保税区海关监管办法”)

3. Decision of the Standing Committee of the National People's Congress Regarding the Application of

Provisional Regulations on Such Taxes as Value-added Tax, Consumption Tax and Business Tax to En-

terprises with Foreign Investment and Foreign Enterprises

(“全国人大常委会《关于外商投资企业和外国企业适用增值税、消费税、营业税等税收暂

行条例的决定》”)

4. Rules for the Implementation of the Income Tax Law of the P.R.C. for Enterprises with Foreign Invest-

ment and Foreign Enterprises (“中华人民共和国外商投资企业和外国企业所得税法实施细则”)

5. Income Tax Law of the P.R.C. for Enterprises with Foreign Investment and Foreign Enterprises

(“中华人民共和国外商投资企业和外国企业所得税法”)

6. Provisions on Taxation Policies Applied to National High Technology Industrial Development Zo-

ne(“国家高新技术产业开发区税收政策的规定”)

7. Provisional Rules on Certain Policies Applied to National High Technology Industrial Development Zone

(“国家高新技术开发区若干政策的暂行规定”)

8. Circular on Certain Preferential Policies of Corporate Income Tax

(“关于企业所得税若干优惠政策的通知”)

9. State Administration of Taxation Circular on Application of Preferential Taxation Policies to High Tech-

nology Enterprises (“国家税务总局关于高新技术企业如何适用税收优惠政策问题的通知”)

18 A correspondence from China to the WTO indicated laws on regulations on special economic areas of China, see WT/ACC/CHN/46, at <www.wto.org>









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Special Economic Areas of China and WTO - Will the ... · SPECIAL ECONOMIC AREAS OF CHINA AND WTO – WILL THE ... rate applied to economic and technical development zones, high technology