China (Shanghai) Pilot Free Trade Zone: Dawn of a new era

Business Regulation and Tax Newsflash

Issue 1 - 11 July 2013

On 3 July, 2013, the “Overall Plan for China (Shanghai) Pilot Free Trade Zone” was approved in principle at the State Council Executive Meeting held by Premier Li Keqiang. It was emphasized that the establishment of China (Shanghai) Pilot Free Trade Zone ("China (Shanghai) PFTZ") combining four customs supervision areas, including the Shanghai Waigaoqiao Free Trade Zone, under the administration of the one authority, is a big step towards the continued opening up of China's economy. The China (Shanghai) PFTZ will serve as a role model nationwide; if successful it will likely be expanded, and thus will contribute to the overall development of the economy. It will increase China’s global competitive advantage, establish a new platform for cooperation and development with other countries, present new potential for economic growth, and achieve an “upgraded” Chinese economy.

Why is China establishing this Pilot Free Trade Zone?

China is concerned about the potential impact of the Trans-Pacific Partnership Agreement (TPP), which is a comprehensive free trade agreement covering a very broad range of goods and services, on its trading relations with TPP parties. The TPP is being promoted by the US. Although it currently covers only four countries, negotiations with other six countries including Australia and Japan, which are major trading partners of China, are in progress. To date, China has not been invited to participate in the TPP. However, it is well known that China is interested to participate in the TPP. In the meantime, China continues to concluding FTAs with its trading partners; the most recent being the China/Switzerland FTA.

China is also under pressure to relax existing controls over investment and foreign exchange capital account items. China also wishes to make the Rmb an international settlement currency.

The China (Shanghai) PFTZ allows China to observe the impact of the relaxation and/or removal of controls and restrictions in respect of the trade in goods and services, controls over investment and foreign exchange capital items, and measures promoting the "internationalization" of the Rmb.

What's new?

Finance, especially foreign exchange
It was reported that, during the recent Lujiazui Forum, Yang Xiong, the Mayor of Shanghai, indicated that foreign exchange controls in respect of capital items may be significantly relaxed or even removed in the China (Shanghai) PFTZ. Xu Quan, the Vice Director of the Shanghai Financial Services Office noted that the China (Shanghai) PFTZ rules may allow for the liberalization of interest rates, the free conversion of Rmb, and the removal of limitations over foreign participation in the financial industry and the offshore banking business.

Tax system
We expect the China (Shanghai) PFTZ to provide a competitive preferential tax regime to attract businesses such as regional headquarters, offshore trading, shipping and logistics businesses, and financial leasing businesses. At present, low tax rates for qualifying businesses, as well as the deferral of tax on offshore investment income are proposed.

It should be noted that, at present, there are only around 400 headquarters in comprehensive bonded zones in Shanghai, far fewer than the 4,000 in Singapore and 3,000 in Hong Kong. One of the objectives of the China (Shanghai) PFTZ is to redress the balance in this aspect.

Investment controls and approvals
Controls over investments which foreign investors are allowed to make, and operations they are allowed to conduct will be significantly simplified and relaxed in the China (Shanghai) PFTZ. In principle, all investments are allowed unless stipulated in the "Negative List".

For example, it was noted that foreign banks are allowed to form wholly-owned subsidiaries in theChina (Shanghai) PFTZ.

The China (Shanghai) PFTZ policies will override existing rules and regulations which are in conflict with them. The revision of such rules and regulations may take some time; however, investors may conduct their business by reference to the policies in the meantime, notwithstanding that the relevant rules and regulations have not yet formally been altered.

Customs supervision
Customs and port supervision procedures will be updated and simplified. For example, there will be a gradual shift from the physically fenced area monitoring to electronic supervision thereof. The use of post declaration audits as a means of routine control, in place of detailed reviews of import and export declarations, is also contemplated. These improvements are intended to encourage trading in goods, in particular, entrepot trades.  

Which companies/sectors will be most affected?

The main beneficiaries include:

  • Finance sector businesses
  • Regional headquarters of MNCs
  • Regional sales and procurement centers
  • Shipping and logistics sector businesses
  • Cultural, creative and media sector businesses

The retail sector will benefit from the expansion of tax free shopping in the China (Shanghai) PFTZ, and its potential association with the Disney Park.

Recommended actions

Whether you have already invested in China, or are considering so to do, in particular in Shanghai and surrounding areas, you should now start to explore the opportunities that theChina (Shanghai) PFTZ potentially presents to you.  

Since the establishment of the China (Shanghai) PFTZ is still "in progress", full details concerning its operation and governing framework and rules are as yet not finalized. Nonetheless, we do now already have a sufficiently clear picture of its objectives, governing framework and rules, as well as the overall direction of its operations, on the basis of which you may analyze its potential impact in respect of your investments and business models.  

Clarification concerning aspects which are identified as "key" may now also be sought from responsible authorities; in fact, there now exists the opportunity to influence the ultimate shape of the China (Shanghai) PFTZ.

Deloitte is able to support you, in relation to legal, tax and business advisory aspects of your analysis, and is also able to facilitate and assist you in relation to communications with relevant responsible China (Shanghai) PFTZ authorities.Please call your usual Deloitte contact or our China (Shanghai) PFTZ Lead Partners listed below:

Vivian Jiang
Deloitte China
Tel: +86 21 6141 1098
Clare Lu
Qin Li
Tel: +86 21 6141 1488

Note: Qin Li Law Firm is a licensed Cinese law firm and forms part of Deloitte's global Tax & Legal network. Deloitte Legal is one of the major legal practices around the world.

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