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Important Reform of Foreign Exchange Administration System for Trade in Goods
On Dec 01, 2011 China rolled out a pilot reform of its foreign exchange control system for international trade in goods in pilot regions including Jiangsu, Shandong, Hubei, Zhejiang (excluding Ningbo), Fujian (excluding Xiamen), Dalian, and Qingdao.
The main purpose of the pilot program is to make international trading in foreign exchange more efficient, transparent and strengthen the information sharing system for foreign exchange receipts from exports and export tax rebates.
1. During the pilot period, companies in the pilot region are not required to undergo procedures for the verification and writing-off of foreign exchange collections from exports, or in other words, the export companies in the pilot regions will not be required to provide paper Export Verification Form for foreign exchange collection with Foreign Exchange authorities and Tax bureaus.
2. Notwithstanding, the export companies will still be required to provide an export verification form for foreign exchange collections, while making customs declarations for exports. However, this requirement will be removed when the reform is accepted nationwide.
3. All three authorities - the State Administration of Foreign Exchange, the State Administration of Taxation, and the General Administration of Customs will further strengthen their cooperation through better data/information sharing and crack down on irregular cross-border capital flows and on activities such as tax fraud and smuggling.
4. This is the first time that SAFE has introduced classification system according to which the pilot enterprises will be assigned grade A, B and C based on certain criteria as discussed below in detail.
Companies in the pilot regions will be classified into three main categories, namely, Grade “A”, Grade “B”, and Grade “C”. This classification will be assigned to the companies based on the outcome of on-site verifications and their compliance with the provisions on foreign exchange administration.
Companies rated “A” will be subject to simplified procedures while paying or receiving foreign exchange during import or export trade transactions. However companies rate “B” or “C” will be subject to stricter supervision with respect to foreign exchange receipts and payments.
1. On-site verification: The foreign exchange authorities may carry out on-site verifications of enterprises that fall under any of the following circumstances within the verification period:
i. The percentage of deviation of any of the aggregate verification indicators from the indicator threshold exceeds 50％;
ii. Any of the aggregate verification indicators has exceeded the indicator threshold in the local region for four consecutive verification periods;
iii. The ratio of the trade credit balance [See footnote 1], i.e., the ratio of advance receipt balances, the ratio of advance payment balances, the ratio of deferred receipt balances, or the ratio of deferred payment balances is more than 25%;
iv. The processing fee rate for processing with imported materials is more than 30%;
v. The difference between the receipts and payments from entrepôt trade accounts for more than 20% of the payments;
vi. The amount of a single foreign exchange refund exceeds the equivalent of USD 500,000 and refunds have been made on more than 12 occasions;
vii. Other circumstances in which the on-site verifications are required as determined by the foreign exchange authorities.
The foreign exchange authorities may make adjustments to the above ratios, amounts, or frequency on the basis of the results of the off-site verifications and with reference to the characteristics of the region, industry, or economic type.
2. Off-site verification:
i. The foreign exchange authorities shall carry out off-site verifications of the foreign exchange receipts and payments from trade through the Monitoring System on a monthly basis.
ii. The data subject to off-site verifications include the enterprises’ relevant data on foreign exchange receipts and payments from trade and on the import and export of goods during the most recent 12 months.
3. Category A:
Enterprises that have complied with the relevant provisions on foreign exchange administration during the verification period and whose foreign exchange receipts and payments from trade are confirmed as normal by the off-site or on-site verifications by the foreign exchange authorities may be classified as Category A enterprises.
4. Category B:
i. Enterprises falling under the following circumstances shall be classified as Category B enterprises:
ii. Enterprises subject to on-site verifications, and cannot provide a reasonable explanation;
iii. Enterprises fail to perform their reporting duties as required;
iv. Enterprises fail to handle the registration formalities for foreign exchange business from trade in goods as required;
v. Enterprises fail to report to or provide materials to the foreign exchange authorities according to the specified time limit and method during the on-site verifications by the foreign exchange authorities;
vi. Enterprises to be jointly supervised by the foreign exchange authorities at the request of the relevant authorities of the State;
vii. Other circumstances deemed eligible by the foreign exchange authorities.
5. Category C:
i. Enterprises falling under any of the following circumstances shall be classified as Category C enterprises:
ii. Enterprises punished by the foreign exchange authorities or investigated or prosecuted by the judicial authorities for serious violations of the provisions on foreign exchange administration during the past 12 months;
iii. Enterprises obstruct or refuse to allow the foreign exchange authorities to conduct on-site inspections or provide false materials;
iv. Category B enterprises, in light of their specific circumstances, continue to be classified as Category B enterprises on the basis of a comprehensive assessment conducted after the expiry of the period of validity for classified management;
v. Enterprises that have been punished by the relevant authorities of the State for serious violations of the provisions on foreign exchange administration;
vi. Other circumstances deemed eligible by the foreign exchange authorities.
The period of validity of the classified management of Category B and Category C enterprises shall be one year.
POTENTIAL PENALTIES FOR NON-COMPLIANCE:
1. SAFE shall impose a fine of no more than 30% of the amount of evasion in the following circumstances, unless the circumstances are serious where a fine of more than 30% but less than 100% of the amount of foreign exchange involved in the evasion shall be imposed:
i. Where the principal makes foreign exchange payments in violation of the provisions on foreign exchange administration under import agent services, or where the agent fails to collect the foreign exchange as required under export agent services, the foreign exchange authorities shall order the foreign exchange to be transferred back to China and shall impose a fine of no more than 30% of the amount of evasion; where the circumstances are serious, a fine of more than 30% but less than 100% of the amount of foreign exchange involved in the evasion thereof shall be imposed. Where the action constitutes a crime, the importer in question shall be held criminally liable.
ii. The enterprises fail to provide correct information, as a result of which the foreign exchange collection from trade fails to be entered into the To-be-inspected Account to be verified for settlement;
iii. The foreign exchange is collected by the principal under export agent services.
iv. The enterprises handle foreign exchange receipts and payments from trade in violation of the regulations on external debt administration;
v. The agent fails to make foreign exchange payments and violates the regulations on external debt administration under import agent services.
2. The foreign exchange authorities shall order the offender in question to make a rectification within a prescribed time limit, give it a warning, and impose on it a fine of no more than RMB300,000 in cases of:
i. Failing to declare the balance of payments statistics and to declare the special information for verification of foreign exchange receipts and payments from trade according to the Detailed Rules and the relevant regulations;
ii. Failing to provide valid and authentic documents and materials in accordance with the provisions of the Detailed Rules and the relevant regulations;
iii. Failing to enter foreign exchange collections from trade into the To-be-inspected Account in accordance with the provisions of the Detailed Rules and the relevant regulations, and violations of the regulations on foreign exchange accounts administration such as the receipts and payments of the To-be-inspected Account exceeding the allowable limit and the proceeds in the To-be-inspected Accounts being transferred between the accounts;
iv. Failing to handle formalities, such as foreign exchange business registration and so forth, in accordance with the provisions of the Detailed Rules and relevant regulations;
v. Refusing or obstructing the foreign exchange authorities from conducting an on-site inspection or verification according to the law.
3. The foreign exchange authorities shall impose a fine of no more than RMB 30,000 in cases of:
i. Failing to keep the relevant materials or failing to keep all the required materials in accordance with the provisions of the Detailed Rules and the relevant regulations;
ii. Failing to log into the Monitoring System to deduct the corresponding allowable limit of foreign exchange receipts and payments of the enterprises in accordance with the provisions of the Detailed Rules and the relevant regulations during the handling of foreign exchange receipts and payments from trade;
iii. Failing to report to the foreign exchange authorities in accordance with the provisions of the Detailed Rules and the relevant regulations.
We understand that there are many foreign invested companies in China that are financing themselves with late payments and advanced payments and the ratios discussed above can play a crucial role in terms of determining their overall positions and assigning grades. If a company’s ratios (mainly 25% for Grade A) exceed the prescribed threshold, the company may be audited and inspected by the SAFE. In case of failure to justify the over ratios, the company may have to face severe penalties including its downgrading which can adversely impact companies cash flows and in turn its financial strategies. Therefore, we suggest the companies to review their situation and consider its impact on their cash flow.
The main differences between grade A and grade B & C are:
Trade credit ratio
Possibility to go over 90 days
Transactions periods < 90 days
Report to SAFE:
Payment in advance/advance from client
Deferred payment/account receivable
If estimation >30 days
If estimation >90 days
Day of receipts
If estimation >30 days
 “Ratio between proceeds and goods” or trade credit balance means the ratio between the enterprises’ cumulative scale of foreign exchange receipts and payments from trade subject to verifications by the foreign exchange authorities during the most recent 12 months and that of imports and exports during the same period.