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Duties and Tariffs


Harmonized Tariffs:

Tariffs and duties are a complex and often changing world. In effect, each country sets their duties in relation to agreements with other countries. The inter-governmental relationship plays a role in these agreements. The PRC, like any other country, may vary their rates . Among the many reasons for varying rates are:

  • Country of Origin

  • Product manufactured.

  • Different models of a product

  • Technology Levels of product and local availability

  • Desire to protect domestic manufacturers

  • Need for foreign exchange

  • Specific governmental need(Ie. Infrastructure improvements)


General Agreement on Tariffs and Trade(GATT):

China is not currently a member of the General Agreement on Tariffs and Trade(GATT). In the past few year's China has begun efforts to gain membership. Membership will afford better access to world markets for it's products, improved perception in those markets, and improved academic and research support. It has not done so as of this writing.


Country of Origin(CO) and Local Content:

Country of Origin(CO) simply stated, is the country in which a product was manufactured or assembled. Most countries require certification of CO be submitted by the manufacturer, it's marketing organization or distributorship. The actual documentation is normally prepared within the manufacturing organization who has the details and costs components for the products. But classification of Country of Origin is not as simple as saying it was made in our factory in the People's Republic of China. For example, in order for a product assembled in the PRC to be qualified as the Country of Origin for importation into the U.S., at least 50% of the dollar value of the product must be composed of cost items incurred by the factory in the PRC. Country of Origin designation determines the duty rates, import quotas(if any) and whether the product is even allowed into the country.

Local Content is used to determine if a product's Country of Origin. Local Content is the percentage amount of a manufactured product that is manufactured locally within the country. It takes into consideration the entire Unit Manufacturing Cost(UMC) and where the components originated. Countries may require very specific detail to qualify. Parts, components, and local labor is easy to identify as is any costs allocations applied by the home office. Burden is more difficult to sort through and upon occasion is may take the product over the 50% threshold.


Duty and Duty Drawback:

Normally, import duties are applied to goods and services imported into a country. In manufacturing entity that re-exports all or a portion of it's finished product, the entity can apply for duty drawback.

Duty Drawback provides a credit or refund of a portion(most )of the original duty payment. There is an administrative portion of most country's duty rate, so duty drawback in the best of conditions is never 100%. On top of the administrative portion of duty. It is also very difficult to document and obtain all of the duty drawback you could be entitled to. While it may sound good in concept, it is a difficult task in actual application. The administrative efforts, elapsed time between importation of parts and export of finished product, and the amount of paperwork required are the major problems in minimizing the net impact.

Wherever possible, you should explore the advantages of duty free manufacturing zones or Foreign Trade zones as they are often referred to as. In working within the PRC, consider taking advantage of Buy-Sell (described below)contracts. Both duty free zones and Buy-Sell contracts come at the cost of significant administrative requirements. If your operations include both domestic and export sales, significant effort will be required.

Normal duty rates for imported product runs from 40% to 100%. Preferential rates of 25% to 50% are possible if you go through state approved middlemen or a joint venture enterprise. But, preferential rate approval is not a sure thing and this service comes at a price.


Buy-Sell Contracts:

A Buy-Sell contract is an agreement between a PRC located manufacturing company and an offshore(usually Hong Kong based company) to import a set of parts duty free and export assembled/manufactured goods out of China. The PRC manufacturing entity:

  • Buys an agreed upon quantity of parts and raw materials.

  • Consumes the imported goods along with local labor, burden and oftentimes other locally sourced parts.

  • Sells the agreed upon finished quantity back to the offshore company.

The Buy-Sell contract has the distinct advantage of avoiding the process of paying duty, then applying for duty drawback. In most Duty-Duty Drawback situations there is difficulty in obtaining the drawback credit. Usually, the duty drawback rate is slightly lower than the Duty rate-- representing a non-refundable administrative cost(see above).

The Buy-Sell contract is not free of administrative and other controls. Creation of the customs book and significant paperwork and documentation are also required. But, it is far more cost effective than to go the duty-drawback route.

If your operations are strictly for export, then inventory control are less difficult. If you have both export and domestic consumption, then you will need to segregate the inventories and costs, utilizing a far more difficult process.


Customs Book:

The book maintained with PRC Customs Officials that documents imported parts and component prices and quantities and the resulting export prices of buy-sell contracts. Once established, it is difficult to change import prices. Small reductions in import prices(less than 10%) are relatively easy to pass through customs. Price increases of any size, or significantly lower prices, will cause major problems and may delay import of parts and components.

Customs books can be changed(up to two times), but it is a difficult and complex task.


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