China: Foreign Investment Bulletin - July 2016

Last Updated: 10 January 2017
Article by Catherine Miao, Vivian Pan, Dora Feng and Sean Mei

The State Council has issued the Decision of the State Council to Revise the Customs Audit Regulations of the People's Republic of China, providing various revisions including a provision for extending the time customs is allowed to audit imported goods which receive tax reductions or exemptions.

The Standing Committee of the Shanghai Municipal People's Congress passed the Rules for Advancing Construction of the International Shipping Center in Shanghai, to fully implement and carry out the national plan for construction of the Shanghai International Shipping Center.

Guangdong will issue 16 new measures – including 6 measures applicable to China (Guangdong) Pilot Free-Trade Zone and 10 measures applicable to whole Guangdong Province – to facilitate entry and exit, the stay and residence of top talents, entrepreneurs, overseas Chinese, foreign students, ordinary workers, and domestic workers, etc.

1. The Decision of the State Council to Revise the Customs Audit Regulations of the People's Republic of China

On June 19, 2016, the State Council issued the Decision of the State Council to Revise the Customs Audit Regulations of the People's Republic of China (the "Newly-revised Customs Audit Regulations"), providing various revisions to the previous Customs Audit Regulations of the People's Republic of China published in 2011 (the "Previous Customs Audit Regulations"), including a provision for extending the time customs is allowed to audit imported goods which receive tax reductions or exemptions, an increase of legal liability arising from a breach of relevant audit regulations, and an introduction of new provisions where lighter or mitigated penalties should be imposed for self-reporting of instances of non-compliance, etc. The Newly-revised Customs Audit Regulations will be effective as of October 1, 2016.

1.1 Background

On June 11, 2014, the Legal Affairs Office of the State Council issued the Customs Audit Regulations of the People's Republic of China (Revised Draft for Comments) (the "Draft for Comments") to solicit public opinion. After a long period of more than two years, the State Council recently announced the Newly-revised Customs Audit Regulations. However, we have found that its general scope of revisions is narrower than that of the Draft for Comments, and a number of revisions proposed in the Draft for Comments (including summary audit procedures and audit review system, etc.) are not included in the Newly-revised Customs Audit Regulations

1. Extending the time customs is allowed to audit imported goods which receive tax reductions or exemptions

The Customs Law of the People's Republic of China provides that, customs agents may at any time, throughout the customs supervision period and within 3 years after the customs supervision period, carry out an audit of the goods imported by foreign-invested enterprises which are approved by relevant authorities to receive tax reductions or exemptions. Detailed regulations shall be enacted by the State Council. However, the Previous Customs Audit Regulations provide that the audit period for imported goods which receive tax reductions or exemptions only extends to the customs supervision period.

The Newly-revised Customs Audit Regulations have changed the audit period for imported goods which receive tax reductions or exemptions and it now extends not only to the customs supervision period but also an additional 3 years following, which is consistent with that of the Customs Law of the People's Republic of China. In the meantime, it requires that relevant documents, contracts and other materials shall be retained for a period no less than the customs audit period.

2. Lighter or mitigated penalties should be imposed for self-reporting of instances of non-compliance

The Newly-revised Customs Audit Regulations bring in a new provision to impose lighter or mitigated administrative penalties for enterprises and organizations that proactively report their non-compliance with customs regulations to the customs authorities and accept the decisions of customs authorities.

3. A heavier legal liability is imposed

For non-compliance such as providing false information or concealing material facts, refusal or postponement in providing, transferring, hiding, tampering or destroying relevant materials, the Newly-revised Customs Audit Regulations have increased the penalties. Any audited party who fails to rectify its non-compliance can now receive a fine of RMB 20,000 - 100,000, an increase from the amount stipulated in the Previous Customs Audit Regulations of RMB 10,000 - 30,000. In addition, the personal fine imposed on the directly responsible person has been increased to a fine of RMB 5,000 - 50,000, a rise from the prior amount stipulated in the Previous Customs Audit Regulations of RMB 1,000 - 5,000.

The Newly-revised Customs Audit Regulations have removed previous penalties for not establishing or compiling proper accounting records in accordance with the regulation, and has stipulated that legal liability of such non-compliance shall be pursued in accordance with the Accounting Law of the People's Republic of China, for the purpose of eliminating discrepancies between different penalty provisions in different laws and regulations.

4. Assistance of professional institutions in the process of auditing

According to the Newly-revised Customs Audit Regulations, customs may choose to engage professional institutions such as accounting or tax firms to provide professional opinions on relevant issues, or use those professional opinions provided by the professional institutions which are engaged by the audited party as a reference during the auditing process.

5. Electronic data

The Newly-revised Customs Audit Regulations remove the previous requirement of keeping paper copies of accounting records which are stored in and printed from computers, in order to implement a paperless process. Meanwhile, it specifically lists the storage medium of electronic data as one of the materials which are subject to relevant provisions on storage, provision, seizure and distrainment of materials.

6. Protection of the right to know

The Newly-revised Customs Audit Regulations specifically require the customs authority to give prior notice to the audited party before commencing the audit; and only in an emergency situation where the audited party is highly suspicious of breaching the law and its relevant materials such as accounting records and documents, as well as imported and exported goods, are likely to be transferred, hidden, destroyed or otherwise concealed, the customs agents are permitted to not give prior

notice to the audited party before commencing the audit. Also, the Newly-revised Customs Audit Regulations put forward specific requirements that the customs authority should specifically notify the audited party of its rights during the auditing process, and should provide an explanation at the conclusion of the audit.

On the other hand, the Newly-revised Customs Audit Regulations no longer require the audit agents to seek the audited party's opinion before submitting the audit report to the customs authority in all circumstances. The audited party's opinions are only required when it is deemed suspicious of illegal activity.

7. Connections with the Administrative Coercion Law

The Newly-revised Customs Audit Regulations have replaced the terms used for administrative coercive measures, i.e. "temporary seal-up" and "seal-up", with "seizure and distrainment" as stipulated in the Administrative Coercion Law.

8. Credit management

The Newly-revised Customs Audit Regulations require examination of import and export credit status of enterprises and organizations (i.e. compliance records on import and export activities) as one of the key considerations for the customs authority to determine the focus of the audit.

9. Authority of collecting materials

The Newly-revised Customs Audit Regulations grant the customs agents a broader authority to collect required materials. The customs agents may collect information related to specified goods, industries and import/export activities from relevant industry associations, governments and relevant enterprises. Where the information collected involves trade secrets, the customs authority should keep such information in confidence.

1.3 Next Steps

Given that the Newly-revised Customs Audit Regulations have made significant changes to the Previous Customs Audit Regulations in several aspects, it is expected that the relevant implementation rules to the Previous Customs Audit Regulations, i.e. the Implementation Rules of the Customs Audit Regulations of the People's Republic of China, will also be revised according to the Newly-revised Customs Audit Regulations in the near future.

2. Rules of Advancing Construction of International Shipping Center in Shanghai

On June 23, 2016, the 30th meeting of the 14th Standing Committee of the Shanghai Municipal People's Congress passed the Rules for Advancing Construction of International Shipping Center in Shanghai ("Shipping Center Rules"), which are the first local legislation relating to the international shipping center in China.

2.1 Background

On April 14, 2009, the State Council issued the Opinions of the State Council on Boosting Development of Modern Service and Advanced Manufacturing Industry and Establishing International Financial and Shipping Center in Shanghai, which elevate the construction of the international financial center and international shipping center in Shanghai to national importance. On this basis, the Shipping Center Rules were promulgated on June 23, 2016 and implemented on August 1, 2016.

2.2 Legal Review

The Shipping Center Rules, as the first local legislation regarding the international shipping center in China, aim at promoting and supporting every aspect of the Shanghai International Shipping Center ("SISC") development and to achieve the goal of turning Shanghai into an international shipping center with a high concentration of all kinds of transportation resources, comprehensive shipping services and functions, a great shipping environment and market, high efficiency of modern logistics services and capacity for distribution of global shipping resources, to comply with national strategies and current Chinese economic development.

The Shipping Center Rules regulate and cover the overall construction of the SISC and sets out the relevant principles in four aspects, including planning and infrastructure construction, the construction of shipping services systems, the construction of shipping technology renovations and the construction of shipping business environments.

The Shipping Center Rules clarify that the negative list system for foreign investment entry and market entry shall be applied during the construction of the SISC according to

relevant rules and regulations, and states that foreign investments are encouraged and supported in the following areas:

  1. Encouraging the participation of foreign investment in the construction of the SISC

The Shipping Center Rules encourage both domestic and foreign capital to invest in the construction of the SISC via methods including establishing shipping funds to provide finance services for development of the shipping industry.

According to applicable rules in effect including the Interim Provisions on the Investment of Foreign-invested Companies in China and Provisions of the Ministry of Commerce on the Establishment of Investment Companies with Foreign Investment, if the foreign investors participate in the construction of the SISC by establishing shipping funds, they still shall comply with relevant restrictions (if any) relating to foreign investment.

  1. Encouraging foreign enterprises to participate in shipping-related services

The Shipping Center Rules encourage and support foreign enterprises in participating in the following shipping-related services:

  1. Foreign cruise companies which register and incorporate profit-making organizations in Shanghai to provide cruise services on international routes upon approval;
  2. Airline companies with major operating bases located in Shanghai as well as domestic and foreign airline companies and airline alliance who jointly participate in the construction of the world-class international airline pivot with advanced quality services; and
  3. Foreign airline companies and service providers of integrated logistics to establish aviation logistics transfer centers in Shanghai aircraft areas, to promote the application of the internet of things and to carry out multi-modal coordinated transportation, in order to facilitate the development of aviation logistic services.

2.3 Next Steps

Under the bigger picture of the Silk Road Economic Belt and the 21st-Century Maritime Silk Road and as a part of national strategy, the construction of SISC, along with the construction of China (Shanghai) Pilot Free-Trade Zone, creates a unique opportunity for foreign capital to invest in Shanghai Shipping Services. The Shipping Center Rules set out the framework for the construction of the SISC and we should continue to pay attention to how these Rules end up being implemented.

The Shipping Center Rules also require the Shanghai government to explore and establish the international ship registration system in the China (Shanghai) Pilot Free-Trade Zone based on relevant national laws and regulations, which is also worth our attention.

3. Guangdong Province Is to Implement 16 New Measures to Facilitate Entry and Exit, Stay and Residence of Foreigners

After Shanghai, Beijing and the China (Fujian) Pilot Free-Trade Zone, the Ministry of Public Security ("MPS") issued 16 new measures to facilitate the entry and exit, as well as the stay and residence of foreigners in order to support construction and development of the China (Guangdong) Pilot Free-Trade Zone ("GDFTZ"), including 6 measures applicable to GDFTZ and 10 measures applicable to all of Guangdong Province, in order to provide convenience for the entry and exit, as well as the stay and residence of foreign top talents and innovative entrepreneurs. These new measures were officially implemented on August 1, 2016.

3.1 Background

The Law of the People's Republic of China on the Control of the Entry and Exit of Foreigners, implemented on February 1, 1986, is the first piece of legislation regulating the entry and exit, as well as residence of foreigners in China. This law was abolished and replaced on July 1, 2013 by the Law of the People's Republic of China on the Administration of Exit and Entry which provides more detailed provisions regarding the entry and exit, as well as the residence of foreigners in China.

For the purpose of regulating administration of the examination and approval for foreigners to obtain permanent residence in China, the MPS and the Ministry of Foreign Affairs jointly issued the Administrative Measures for the Examination and Approval of Permanent Residence of Foreigners in China on August 15, 2004, which for the first time set out detailed rules for the requirements of foreigners applying for permanent residence in China, including application materials, approval terms, and accumulated terms for approved foreigners of residing in China per year.

In order to attract more foreign top tier talents to invest and work in China, the State Council along with many other departments, issued several regulations to facilitate foreigners' applications for visas and residence permits, as well as entitlements for foreigners permanently residing in China (i.e., foreigners with a Foreigner Permanent Residence Certificate were entitled to national treatment, except for political rights and other rights or obligations specified by laws and regulations that are not to be enjoyed by foreigners).

In 2015, the MPS for the first time issued 12 measures relating to the entry and exit, as well as the stay and residence of foreigners aiming at facilitating more convenient processes and creating more efficient entry and exit services, as well as providing better residing treatment, to support Shanghai in developing into a technology innovation center with global influence.

In 2016, the MPS issued several new measures one after another relating to the entry and exit, as well as the stay and residence of foreigners to support the construction and development of Beijing and the China (Fujian) Pilot Free-Trade Zone.

3.2 Legal Review

The 16 new entry and exit measures to be implemented in Guangdong Province mainly focus on foreign top tier talents, Chinese entrepreneurs returning from overseas, young foreign students and foreign investors needed for the construction and development of GDFTZ. Highlights for these measures mainly include:

Frist of all, for entry and exit:

Newly added provisions for handling Visa Class R (Talent) and Visa Class Z (Work) at the visa issuing offices for the port of arrival.

Supporting Guangdong Province to apply to the State Council for 144-hour visa-free travel for certain state personnel and to achieve joint implementation of visa-free policy at land, marine and aviation ports.

Secondly, for residency:

  • Simplification of the application formalities for working residency permits so that foreigners can apply for working residency permits with working approval certificates without first obtaining the Foreigner Employment Certificate or Foreign Expert Certificate.
  • Allowing foreign students studying in China to apply for personal affair-related residency permits (marked with "Entrepreneur") to carry out internships and innovation and entrepreneur activities. If recruited by relevant employers, they can apply for a work class residency permit.
  • Top tier talents from aboard and Hong Kong, Macau and Taiwan may employ foreign domestic workers who shall also apply for personal affair-related residency permits (marked with "Domestic Work") for the relevant period.
  • Last but not least, for permanent residency:
  • Broadening the scope for applications for permanent residency: establishes a system for recognizing market talents (allowing foreigners meeting certain standards of income and paid taxes to apply for permanent residency); authorizes Guangdong Provincial Public Security Department to collaborate with relevant departments to set the standard for the system for recognizing top tier talents and the GDFTZ talents scoring and evaluation standards.
  • Lowering the requirements for application of permanent residency: for example, direct investment with an amount of no less than USD 2 million is now reduced to direct investment in GDFTZ with an amount of no less than USD 1 million.
  • Expanding the scope of investors eligible to applying for permanent residency: under the current regulations, those eligible to apply are indirect investors of natural persons. This is expanded to investments through enterprises of which the natural person is the controlling shareholder.
  • Shortening the examination term: the current term of 6 months is shortened to 90 working days.

3.3 Next Steps

After the new measures of entry and exit implemented in Shanghai, Beijing, the China (Fujian) Pilot Free-Trade Zone and GDFTZ have been examined in practice and further improved, these measures will be gradually implemented at a national level. It is worth our attention to see whether or not the MPS and the Ministry of Foreign Affairs, under the newly amended Administrative Measures for the Examination and Approval of Permanent Residence of Foreigners, will expand the scope of eligible applicants and reduce the requirements for applying for permanent residency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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