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LEGAL ASSIISTANCE: Reform of Foreign Exchange Control over Trade in Services
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Background


The foreign exchange control system in China is one of the legalisation methods established by the State Administration of Foreign Exchange (“SAFE”) under the guidance of the State Council to restrain or boost the international transactions and/or investment by regulating the cross-border flow-in and flow-out of foreign exchange under the foreign direct investment, trade in goods and services and other kinds of transactions. From 2011 onwards, SAFE has successively launched its reform in relation to the trade in goods and foreign direct investment to satisfy the rapid economic growth and to accommodate the investment environment in China.


For the trade in services, since 2002, cross-border remittance or reception of foreign exchange is subject to the prior examination and approval of the local counterpart of SAFE or its authorised banks depending on the types or amount of the transactions. To apply for the said approval, enterprises or individuals are required to present various documentations, which might be time-consuming and causes inconvenience in practice.


In light of the above situation and as per the requirement of the State Council, to accelerate the development of service industry which accounted for around 44.6% of China’s GDP in year 2012, SAFE rolls out the nationwide legislation reform of trade in service by releasing the Guidelines for the Administration of Foreign Exchange Under Service Trade (“Guidelines”) and the Implementation Measures of it (“Implementation Measures”) on July 18, 2013 as part of Huifa [2013] No. 30 (“Circular 30”). According to Circular 30, around 50 previous regulations are abolished, and the Guidelines and the Implementation Measures shall be effective upon September 1, 2013.

 

Overall Evaluation of the Reform


Generally, the Guidelines and the Implementation Measures aim to facilitate enterprises and individuals carrying out foreign exchange business under the service trade in China. According to the new rules, the examination and approving authority will be decentralised and all devoted to the banks, and documentation formalities required for the examination by banks will either be cancelled or streamlined. To further benefit the service trade operator, enterprises in China including enterprise groups are allowed to deposit their foreign exchange earnings under service trade overseas.


For the purpose of this article, we would like to further introduce the following key features under this reform:

 

Key Features


·
Devolution of Power to Banks and Overall Supervision of SAFE


Enterprises and individuals can perform remittance or receipt of foreign exchange payment before relevant banks directly.


SAFE and its local counterpart will monitor the performance of enterprises as per the data reported by relevant banks. In the event of unusual circumstances detected by SAFE, an off-site or on-site inspection could be triggered. For such a purpose, Circular 30 requires the enterprises or individuals as well as relevant banks shall keep the transactions documentations for 5 years for future reference and for possible inspection purposes (before reform, operators are only required to keep documents for 3 years).


·
Cancellation or Simplification of the Examination Procedures of Banks


According to an online Q&A released by SAFE on July 24, based on the statics of year 2012, the considerations in around 88% of transactions are below USD 50,000, thus, in order to benefit most of transactions in practice and increase the efficiency of foreign exchange administration, the USD 50,000 has been chosen as the benchmark for establishment of below mechanism:


1) If the transaction amount being USD 50,000 or less


The banks are in principle not required to examine and verify any transaction documents for receiving and paying foreign exchange under services trade where the value of such funds is the equivalent of USD 50,000 or less, unless banks detects the nature of such funds being unclear.


2) If the transaction amount being over USD 50,000


If the consideration of per transaction exceeds USD 50,000 the enterprises or individuals will be requested to present agreements, invoices or other transaction documents as per the nature of the concerning transactions.


Compared to the requirements before the reform, the documentation formalities have been simplified. We hereby provide below comparison table in relation to certain types of transactions usually faced or concerned by foreign investors:


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It can be concluded that under the new rules, for most transactions, banks will not be required to examine the registration or certificates issued by other authorities, such as patent registration certificates and technology import/export certificates. In other words, application of certain registration or certificates before other authorities will not be the pre-conditions of cross-border remittance or receipt. In such sense, the simplified procedures will be time-saving and meet the need for transaction of efficiency in China.


·
Cancellation of Tax Certificate of Outbound Payment


This reform is also implemented in collaboration with the State Administration of Taxation (“SAT”).


Before the aforesaid reform, prior to remittance of over USD 50,000, enterprises or individuals shall firstly obtain the tax clearance certificates by performance of tax declarations and tax payments, and then upon the tax clearance certificate, enterprises or individuals shall further apply for tax certificate of outbound payment. The whole tax-related procedures usually may take months.


Upon July 9, 2013, SAT and SAFE jointly issued the Announcement on Issues Concerning Tax Filings for Outbound Payments under Services Trade (“Circular 40”) to abolish the tax certificate of outbound payment previously required. Instead, individuals or enterprises are required to conduct record filing with the in-charge local counterpart of SAT by providing standard filling form, corresponding agreements and other proving documents as may be required, which may take 15 working days.


·
Overseas Deposit of Foreign Exchange Earnings


After the aforementioned reform of foreign exchange system of goods trading, enterprises in China are allowed to deposit their export incomes under goods trading in its overseas account. However, the foreign exchange regulations remain silence on the overseas deposit of incomes deriving from the trade in service.




Until now, Circular 30 expressly provides that enterprises can deposit their foreign exchange incomes from service trade overseas, on the condition that the following requirements can be met:


1) Enterprises have foreign exchange income from trade in services and continually have demand of outbound payment;


2) Enterprises have no violation of foreign exchange regulations within recent two years;


3) Enterprises have established good internal control system in relation to the overseas deposit;


4) The concerning trade in service is related to trade in goods;


5) For enterprise groups who intend to deposit their incomes outside and implement centralized collection and payment, it shall
have realized centralized management of their foreign exchange in China.


6) Other requirements may be raised by SAFE.


If the enterprise groups have implemented centralized management of their foreign exchange in China, it can appoint one of its member companies (including financial company) as the in-charge company to implement centralised collection and payment of overseas deposit.

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Our Recommendations


Through the above introduction, there is no doubt that Circular 30 is designed to facilitate the international trade in service by introduction of efficient administrative procedures and reduction of the transaction cost.


However, it shall be noticed that although Circular 30 cancels or streamlines the documentation requirements for banks
inspection, it does not exempt those transaction operators from compliance with relevant requirements of other authorities under applicable laws and regulations. Therefore, from the point of compliance management, before or after the remittance or receipt, enterprises or individuals shall still perform applicable procedures and/or apply for corresponding certificates or registrations required under the PRC law.

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