China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

I. Regulations on Special Goods Eligible for Deductions and Exemptions

Paragraph 2 of Article 57 of the Customs Law provides three "Specific Uses" for special goods eligible for reductions or exemptions: goods used in specified areas, goods used by specified enterprises or goods used for specified purposes. Such special goods must not be utilized otherwise unless relevant parties have obtained the approval of China Customs and duly paid customs duties. In short, the enterprise enjoying the deduction or exemption of duties on special goods shall bear legal liability if the enterprise utilizes the goods outside of the approved areas, enterprises and purposes without first obtaining the approval of China Customs or duly paying the duties.

Article 26 of the Administrative Measures of the Customs of the PRC for Duty Reduction and Exemption for Import and Export Goods ("Administrative Measures")(3) clarify that "an applicant applying for a reduction or exemption of duties, without the permission of a customs office, shall not transfer, mortgage, pledge, use for other purposes or dispose in any other way the goods that are the subject of such an application."

The provision that an "applicant...shall not transfer, mortgage, pledge…the goods entitled to duty reduction and exemption" is easy to understand for foreign invested enterprises ("FIEs") under most circumstances. However, the Customs Law, the Administrative Measures and other relevant laws and regulations do not specify at the meaning of "using for other purposes or disposing in any other way"(4). Therefore, different enterprises may have different interpretations of this provision. In practice, some FIEs face administrative liabilities for Customs duties because their use of special goods constitutes a "use for other purposes or disposal in any other way". A FIE can even incur criminal penalties in the event that the Customs anti-smuggling departments transfer the case to competent judicial authorities.

II. Analysis of Typical Cases

Based on an analysis of cases handled by the China's customs offices in recently years, acts of "using for other purposes" or "disposing in any other way" are always evidenced by renting, lending, transferring or misappropriating special goods without the approval of customs officials. The following paragraphs will explore the above issue based on a study of typical cases.

A. Using Exempt Equipment for Other Purposes without Approval

A foreign invested beverage enterprise planning to produce juice beverages, tea beverages and drinking water prepared a Feasibility Study Report, which was approved by the Ministry of Commerce (MOFCOM). The enterprise then obtained the Confirmation Letter on Domestic or Foreign-funded Projects Encouraged to Develop by the State ("Confirmation Letter"). In the Confirmation Letter, the "Project Specifications" were written as "fruit processing". Later, the enterprise imported $4 million worth of filling equipment, which enjoyed a special deduction of duties. However, due to the decline of the domestic market, the enterprise, without the approval of customs officials, used the equipment to produce bottled water. The Customs Investigation Department discovered such illegal acts while they were conducting a verification procedure on goods subject to duty reductions and exemptions. Customs officials initiated an investigation over this issue and determined that the production changes by the enterprise were an act of "using the goods for other purposes".The Customs Office imposed a fine of RMB 1.07 million according to the Regulation of the People's Republic of China on the Implementation of Customs Administrative Punishment(5), and ordered the enterprise to reimburse the customs duties payable during the period of "using the equipment for other purposes".(6)

The enterprise applied for administrative reconsideration on grounds that "the feasibility study report approved by MOFCOM contains drinking water, therefore using the equipment to produce bottled water does not constitute the act of using for other purposes". The General Administration of Customs ("GAC") rejected the enterprise's reconsideration request and reaffirmed the administrative sanctions.

Therefore, FIEs must strictly comply with the "Approved Items of Project Industry Policy" and "Project Specifications" provided in the Confirmation Letter. Otherwise, the enterprise may violate the provision for "using for special purpose", and thereby conduct an act of "using for other purposes" as determined by customs officials.

B. Changing Entities and Areas without Approval

An overseas enterprise established ten FIEs in Shanghai, Ningbo and other cities. From July 2001 to August 2003, four of the ten enterprises, according to the foreign parent's arrangement, allocated to six other subsidiaries 79 sets of duty-exempt food processing equipment without the approval of customs officials. The four enterprises also issued a Group Fixed Assets Relocation Sheet, and claimed that the ownership of fixed assets did not transfer, and took no fees from the other 6 enterprises. Customs officials determined the four enterprises' behavior constituted an act of using special goods subject to duty reduction and exemption "for other purposes", imposed a fine on the four enterprises and ordered them to fulfill the goods transfer procedure and fully remit relevant customs duties.

Similar cases occur frequently between parent enterprises and their branch offices. For example, a FIE, without customs approval, uses duty-exempt special goods in other branches (usually processing plants) that are located outside of the approved areas for use of the special goods by customs officials.

In the customs enforcement practice, the enterprise's transfer or misappropriation of duty-exempt special goods are usually alleged to be a violation of the principle of "Three Specific Uses", especially the principles ofusing the goods "in specific areas" and "for specific enterprises". Certain aspects of enterprise's behavior may be determined to be an act of "using" the special goods and thus warrant customs penalties.

C. Circumstances of "Disposing in Any Other Way"

From practice experience in customs cases, the modifying, dismantling, or destroying of special goods subject to duty deduction and exemption without customs approval may be deemed as an act of "disposing in any other way". In addition, there are some specific circumstances in practice that may potentially be deemed as an act of "disposing in any other way".

For example, a joint venture ("JV") imported several sets of duty–exempt equipment within the amount of investment, and such equipment was within the customs supervision period. The JV then applied to reduce the amount of investment and registered capital, which had been approved by relevant administrative authorities. The JV subsequently modified its registered capital with the local Industry and Commerce Administration. However, customs officials found that the value of duty-free equipment owned by the JV exceeded the total amount of investment after this reduction of registered capital, and the excess portion did not qualify under the duty reduction and exemption policy. Therefore, the enterprise had to duly remit the customs duties for the excess portions (the depreciation value before the date the administrative authority approves the investment fund reduction shall be deducted from the taxable base of customs duties), and apply to terminate customs supervision over the excess portions.(7)

III. Conclusion

In summary, parties enjoying a reduction or exemption of duties for special goods must strictly comply with the customs supervision principle of "Three Specific Uses" when they use and manage such goods within the customs supervision period. Any improper disposition of the goods without customs approval may be determined as an illegal activity in violation of customs supervision rules, and the non-compliant parties will bear corresponding legal liabilities.

Notes:

1、Article 56 of the Customs Law:
    Duty reduction or exemption shall be granted for import or export of the goods and inbound or outbound articles listed below:
    (1) advertising items and trade samples of no commercial value;(2) materials presented free of charge by foreign governments or international organizations;(3) goods to which damage or loss has occurred prior to Customs release;(4) articles of a quantity or value within the fixed limit;(5) other goods and articles specified by law as items for duty reduction or exemption;
    Paragraph 1 of Article 40 of the Customs Law:
    Duty reduction or exemption may be granted for import and export goods of the Special Economic Zones and other specially designated areas. The State Council shall define the scope and formulate the rules for such reduction and exemption.
    Article 58 of the Customs Law:
    The State Council shall decide the temporary reduction or exemption of Customs duties which fall under Articles 56 and Paragraph 1 of Article 57 of this Law.
2、The Customs Law of the People's Republic of China ("Customs Law") was adopted at the 19th session of the Standing Committee of the 6th National People's Congress on January 22, 1987, and became effective on July 1, 1987. The Customs Law was revised at the 16th Meeting of the Standing Committee of the Ninth National People's Congress on July 8, 2000，and become effective on July 8, 2000.
3、The Administrative Measures of the Customs of the PRC for Duty Reduction and Exemption for Import and Export Goods was issued on December 29, 2008, and became effective on February 1, 2009.
4、Some Customs officials and experts consider Paragraph 2 of Article 30 of the Administrative Measures as specifying three circumstances of using the goods subject to deduction and exemption as approved by the Customs offices "for any other purposes", though there needs to be clarification of the circumstances of using the goods "for other purposes or dispose in any other way" without the approval of China Customs or paying the customs duties as provided in the Customs Law. However, this regulation only reiterates the three "Specific Uses" from the opposite view point. How to determine the circumstances of "using for other purposes" or "disposing in any other way" is still a myth. Paragraph 2 of Article 30 of the Administrative Measures provide as follows:
    (1) Where goods entitled to duty reduction or exemption are delivered for use to any entity other than the duty reduction or exemption applicant;(2)Where goods entitled to duty reduction or exemption are not used for the originally intended purposes and at the originally intended regions;(3) Any other circumstances in which goods entitled to duty reduction or exemption are not used at the specific regions, by the specific enterprises or for the specific purposes.
5、The Regulation of the People's Republic of China on the Implementation of Customs Administrative Punishment was promulgated on September 19, 2004, and was effective since November 1, 2004.
6、See"Reading Customs case" published by General Administration of Customs of the People's Republic of China, the 2007 edition, page 117 to Page 118.
7、See "Customs Supervision", edited by Xu qiuyan, China Customs Press, 2007 edition, page 208.

一、有关特定减免税货物的监管规定

《海关法》第五十七条第二款明确规定了“三个特定”原则——“特定地区”原则、“特定企业”原则和“特定用途”原则，即特定减免税货物只能用于特定地区、特定企业或者特定用途，未经海关许可并补缴关税，不得移作他用。反之，任何未经海关许可并补缴关税，而将享受特定减免税的货物用于原批准的地区、企业或者用途以外的企业，都应当承担违反海关法的法律责任。

此外，《海关进出口货物减免税管理办法》（“《管理办法》”）（5）第二十六条还明确规定，未经海关许可，减免税申请人不得擅自将减免税货物转让、抵押、质押、移作他用或者进行其他处置。

上述规定中“不得擅自将减免税货物转让、抵押、质押”的监管要求，对于外商投资企业来讲通常是不难理解的。但另一方面，因为《海关法》以及《管理办法》等相关法律法规中并没有针对何谓“移作他用”或者“进行其他处置”作出具体的行为描述（6），这使得许多外商投资企业对此问题产生了不同的认识和误解，以致其在实际使用特定减免税货物时，时常发生被海关认定为构成“移作他用”或者“进行其他处置”从而受到行政处罚的情况，甚至因涉嫌走私犯罪而被海关缉私部门移送司法机关追究刑事责任。

二、典型案例解读

通过对海关近年来查处的有关实际案例进行整理、分析后发现，各地海关所认定的“移作他用”或者“进行其他处置”在实践中通常多表现为：未经海关批准，擅自将特定减免税货物进行出租、出借、调拨、挪用等处置。以下将结合部分典型案例加以具体说明。

1、擅自改变特定减免税设备的用途

某外商投资饮料生产企业拟定了以生产果汁饮料、茶饮料和饮用水为主要产品的《可行性研究报告》，报主管商务部门审批后，取得的《国家鼓励发展的内外资项目确认书》中的“项目内容”核定为“水果加工”，此后该企业以特定减免税方式进口了价值近400万美元的灌装生产设备。但上述设备投产后，由于果蔬类饮料国内市场销路不畅，该企业在未经海关批准的情况下，将灌装设备用于生产瓶装纯净水。随后，海关稽查部门在对该企业特定减免税设备使用情况核查过程中发现上述问题，遂对其立案调查，并认定该企业的转产行为已构成将特定减免税设备“移作他用”的违规行为，依照《海关行政处罚实施条例》（7）作出了罚款人民币107万元的处罚规定，同时责令其补缴设备“移作他用”期间的应缴税款。（8）

此后，该企业以“经商务部门批准的《可行性研究报告》中同时包含了饮用水，故不构成将特定减免税设备‘移作他用’”为由，向海关总署申请行政复议。 海关总署经审查后，驳回了该企业的复议请求，维持了原主管海关作出的行政处罚决定。

因此，外商投资企业在使用特定减免税货物进行生产经营时，一定要特别注意严格遵守《国家鼓励发展的内外资项目确认书》中核定的“项目产业政策审批条目”和“项目内容”等相关内容，否则很可能会因违反“三个特定”原则中的“特定用途”原则，而被海关认定为将特定减免税货物“移作他用”。

2、擅自改变使用主体和使用地区

某境外企业先后在上海、宁波等地设立10家外商投资企业。2001年7月至2003年8月间，其中的4家外商投资企业根据国外母公司的统一部署，在未经海关许可的情况下，将合计79台特定减免税食品加工设备调拨给其他6家子公司使用，并开具集团固定资产转移单，固定资产所有权不作转移，也不收取任何费用。最终，上述行为被海关认定为构成将特定减免税设备移作他用的违规行为，对上述4家公司处以罚款并责令其补办结转手续。

类似的案例还经常发生于企业及分支机构之间。例如，某外商投资企业因各种原因，未经海关许可，将特定减免税货物交由其在特定地区（经海关批准的地区）外设立的分公司（通常是加工工厂）使用。

在海关执法实践中，企业的上述擅自调拨、挪用特定减免税货物的行为，通常都会涉嫌违反“三个特定”原则中的“特定地区”或者“特定企业”这两个原则，进而被海关认定为构成将特定减免税货物“移作他用”加以处罚。

3、涉嫌“进行其他处置”的情形

从海关的执法实践来看，未经海关批准，擅自将特定减免税货物进行改装、报废、毁损等行为，都可能会被海关认定为构成“进行其他处置”。此外，在实践中还有一些较为特殊的问题，也存在被认定为构成“进行其他处置”的风险。

例如，某中外合资企业在投资总额内进口了一批免税设备，该批设备处于海关监管期限内。后该企业申请减少投资总额和注册资本并获得审批机关批准，并随之办理了工商变更登记手续。但在后来的海关稽查中，海关认定，该企业减少投资总额的行为导致其之前免税进口的设备价值超出了现有的投资总额，超出部分不符合享受减免税政策的有关要求，从而要求企业针对超出部分，按照审批部门批复其减少投资总额的日期确定折旧年限补缴税款，并办理解除监管手续。（9）

三、结语

综上所述，在海关监管年限内，特定减免税货物的申请人必须在海关监管下，严格按照“三个特定”原则等海关监管要求进行使用和处置，任何未经海关许可的处置行为都有可能被认定为违反海关后续监管要求的行为，进而被要求承担相应的法律责任。

注释：

1、《中华人民共和国海关法》于1987年1月22日第六届全国人民代表大会常务委员会第十九次会议通过，1987年7月1日起施行。根据2000年7月8日第九届全国人民代表大会常务委员会第十六次会议修正，2000年7月8日起施行。
2、《海关法》第五十六条:
    下列进出口货物、进出境物品，减征或者免征关税：
    （一）无商业价值的广告品和货样；（二）外国政府、国际组织无偿赠送的物资；（三）在海关放行前遭受损坏或者损失的货物；（四）规定数额以内的物品；（五）法律规定减征、免征关税的其他货物、物品；
3、《海关法》第五十七条第一款:
    特定地区、特定企业或者有特定用途的进出口货物，可以减征或者免征关税。特定减税或者免税的范围和办法由国务院规定。
4、《海关法》第五十八条：
    本法第五十六条、第五十七条第一款规定范围以外的临时减征或者免征关税，由国务院决定。
5、《海关进出口货物减免税管理办法》于2008年12月29日颁布，2009年2月1日起施行。
6、当然，有些海关人员或者专家学者认为，《海关进出口货物减免税管理办法》第三十条第二款，对经海关许可后的减免税货物的“移作他用”规定了三种情形，可以参照此项规定，对未经海关许可并补缴关税的“移作他用”或者“进行其他处置”的情形进行理解。但是，如果仔细研读该法条后会发现，该规定仅是从相反的角度，将 “三个特定”原则进行了简单的重申，对于如何判断何谓“移作他用”或者“进行其他处置”的问题来讲，仍然显得过于抽象。具体规定如下：将减免税货物交给减免税申请人以外的其他单位使用；未按照原定用途、地区使用减免税货物；未按照特定地区、特定企业或者特定用途使用减免税货物的其他情形。
7、《海关行政处罚实施条例》于2004年9月19日颁布，同年11月1日起施行。
8、见海关总署政策法规司《案说海关》，中国海关出版社2007年版，第117页～第118页。
9、见徐秋跃主编《海关稽查》，中国海关出版社2007年版，第208页。

2. Pursuant to the Notice, MOFCOM will adopt a filing system for the establishment of new branches by FIEs. The Notice clarifies that establishment of a branch by a FIE does not require MOFCOM or local counterpart approval unless specific regulations state otherwise. This clarifies a previously unresolved issue in that MOFCOM local counterparts had varying practices in such regard from region to region (some local MOFCOM counterparts required approval for FIEs to set up a branch engaged trading). The Notice implies that if the FIE’s business scope relevant to a restricted area has been approved, then no additional approval from MOFCOM is required to set up a branch for the approved business. Furthermore, the Notice regulates that if a FIE intends to set up a branch abroad, then this should be approved by the provincial MOFCOM with the consent of the Chinese embassy’s commercial department in the country where such branch is to be located.

B. Ease of Approving Holding Companies

On March 6th 2009, MOFCOM also issued the Notice on Delegating the Approval Authority for Foreign Invested Holding Companies to streamline the establishment of foreign investment holding companies.

This notice provides:

1. Proposed holding companies with a registered capital of USD 100,000,000 or less will be examined and approved by the competent MOFCOM counterparts at the provincial or vice-provincial city level. Previously, the establishment of a holding company required MOFCOM level approval regardless of scale.

2. Any amendments to established holding companies (i.e. such as name change, revisions to business scope, normal changes to capital structure) can be approved by lower level MOFCOM counterparts except for cases where a single capital injection increases its value by over USD 100,000,000.

3. Despite the positive developments, MOFCOM also reinforces in the Notice that holding companies cannot invest in areas that are restricted or forbidden to foreign investment. Further, if required by relevant industry rules, investments by holding companies will still need approval from the industry authorities even if approved at the local MOFCOM level.

Summary
The devolution of approval competency for most projects will simplify and speed up the approval process for foreign investors as well as lower the work burden of MOFCOM. In addition, the new policy will make the operations of existing FIEs easier in that many will be able to now bypass central MOFCOM approval for operational actions such as capital increases.
Although, there is no apparent negative impact upon foreign investors in such notices it should be also noted that MOFCOM and other approvals still remain in place under specific circumstances. Foreign investors will need to carefully check which approvals at which level will be required in order to have a valid establishment.

[1] Vice-provincial cities, as an administrative division in China, are not treated as a province from an administrative perspective, but are distinct from a financial perspective.
[2] According to a notice issued by National Planning Commission (the predecessor of National Development and Reform Commission), central government reliant projects include the FIEs using state subsidies, FIEs investing in infrastructure, etc. But this notice was issued in 1999 based on the old Industry Category for Foreign Investment in 1997 which has been revised largely afterwards, thus may be out of date.
 

Before the issuance of such a Circular, the above-mentioned question has for a very long time confused not only foreign investors, its lawyers, and other consultants, but also some local officials of SAFE partly due to the reason that SAFE did not clarify this question by issuing an official and universally-applicable rule. As a result the answer to this question has to depend, to large extent, on the local regulatory practice. Not surprisingly, in practice, some local offices of SAFE held a view that a FIE should not be allowed to exchange the foreign currency from its capital account into RMB for purposes of re-investing in China on the grounds that the foreign currency deposited in such account had been specially approved to satisfy the defined project as described in the business scope. In the meantime, some others officials held different views and allowed the FIE to settle the foreign exchange into RMB to satisfy the needs of re-investing in China. This is particularly the case where a local government is thirsty for foreign investment and it may be driven to take a more flexible policy.

Now, with the promulgation of the Circular, the door to direct re-investment by FIE(s) using the RMB settled from its foreign exchange capital account in China is closed. If a FIE happens to come upon a good investment opportunity, it will have to use its accumulated RMB profits or income or borrow RMB from domestic banks.

As is known in recent years, international “hot” money has unnerved the Chinese government which has thus taken a series of measures to cope with the issue. Without doubt the new rule is intended to strengthen the administration of foreign exchange flow and curb the inflow of hot money. However while it may contribute to the strengthening of its foreign exchange administration and the stability of its economic growth, it may also add the cost of making re-investment by foreign investors through their FIE(s) in some cases more difficult from a commercial perspective.