China has developed a strategic position when it comes to entering into free trade agreements – the policy of allowing dutiable and tax reduction on certain products and services being one of the main cornerstones that has projected the nation to be the world’s manufacturing hub over more recent years. Without doubt, the signing of the China-ASEAN FTA is and will continue to have a huge impact on China and Asia’s development in global sourcing and the foreign investment related to this.
Yet, with the legal and tax professions effectively split in China, not many law firms possess knowledge of China’s FTAs, and consequently ignore them when structuring foreign investments into the country. This is problematic as the identification of, and the ability to utilise applicable FTAs, should often be catered for within the articles of association – as well as be negotiated up front with the relevant customs and tax officials in China. Failing to do so can result in tax overheads that are far more than they ever needed to have been. Some consultants have also been known to deliberately withhold such data to prevent an investor gaining interest in markets externally from the PRC and losing the client to another country perhaps better suited to the client’s needs. Many China consultants simply are not aware of the significance of China’s FTAs, or even the post incorporation procedure for registering a China business with the local customs – which includes the intent to invoke treaty status under any applicable FTA. If this is not done at China customs registration, the business can lose all the treaty benefits they are actually entitled to.
In term of China’s Free Trade Agreements, China has eleven Free Trade Agreements in operation, with another three under negotiation and another three under consideration. Of these, many are relatively small, although useful for companies from the countries that have them – Chile, Costa Rice, Iceland and Peru. The Pakistan agreement is often invoked in bilateral Sino-Pak relations, which are of course strong, with Pakistan being the largest recipient of Chinese outbound investment in South-East Asia, while China also has an interesting FTA with Switzerland signed off mid last year and due to come into effect later in 2014.
Switzerland notably is not a member state of the EU, although it is a member of the European Free Trade Association and has a bilateral agreement with the European Union. Switzerland is one of the few European countries to enjoy a trade surplus with China, and the deal was China’s first with a continental European nation. Switzerland’s trade surplus with China was worth some US$23 billion in 2012, notably through the sale of luxury products such as watches, in addition to chemicals. A big winner in the deal was Nestle, which will be passing on savings it can make under the agreement to reduce consumer prices in China, making its products more competitive.
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