Shanghai New Free Trade Pilot Zone ( FTPZ )

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1 Shanghai New Free Trade Pilot Zone ( FTPZ ) Damon Paling, Partner Ray Zhu, Partner September 5, 2013

2 Speaker Introduction Damon Paling Partner, Customs and Trade Contact Tel: 86 (21) Ray Zhu Partner, Corporate Tax Contact Tel: 86 (21)

3 Agenda What s the big picture? Evolution of FTZ concept in Shanghai Overview of Shanghai FTPZ Possible policies of the new FTPZ Example of possible business models Timeline where to next? Summary message and future development Q & A 3

4 What s the big picture? In May 2001, the State Council officially passed the <Overall Planning of Shanghai ( )> ( Overall Planning ). In the Overall Planning, it is listed as the development goal for Shanghai that: By 2020, Shanghai will be built as one of the international economic, financial, trading and shipping centres. In March 2008, State Council declared that by 2020, Shanghai itself as one of the world s preeminent international financial centres. Shanghai Municipal Government also announced blueprint for the construction of the Shanghai International Financial Center during the 12th Five-Year Plan period ( ). 4

5 Evolution of FTZ concept in Shanghai Shanghai will first launch test operations on various policies while controlling risks and then gradually work out complete regulations for the free trade zone. Aug 2013 Waigaoqiao ( WGQ ) FTZ is the first free trade zone established in China, with an area of 10 square kilometers. WGQ Bonded Logistic Park ( BLP ) was established 3 miles away from WGQ FTZ. The establishment of Yangshan Bonded Port ( YS BPA ), the first BPA in China, was approved by the State Council. YS BPA was built by Shanghai and Zhejiang cooperatively. Apr 2004 December 2005 Shanghai government combined the WGQ FTZ/BLP, Pudong Airport Bonded Logistic Centre ( BLC ) and YS BPA into an Integrated Bonded Zone ( IBZ ). November 2009 Jul 2013 In early July 2013, the overall plan for FTPZ was passed during the State Council Conference. Detailed plans are now under the discussion of the Standing Committee of the Political Bureau and will be further submitted to Chairman Xi for his approval. Jun

6 Overview of Shanghai FTPZ Location Goal Vision Covering 28 km 2 the FTPZ program includes Waigaoqiao Bonded Area, Waigaoqiao Logistics Park, Pudong Airport Free Trade Zone and Yangshan Port Free Trade Zone. Promote economic growth and become proactive in creating new trade laws. Explore new trade and investment models; boost and open up the service industry; establish a free trade zone to facilitate currency exchange liberalisation for investment and trade; and to form an efficient free trade environment. 6

7 Who may benefit from Shanghai FTPZ? Foreign financial institutions Law firms Foreign payment and foreign credit-rating agencies Financial leasing companies Financial services Professional services Health insurance providers, medical institutions Services relating to the public, cultural, education, and media sectors International shipping Third-party logistics International trades, outsourcing, inspections and repairs Trade services RHQ and operation centres Regional headquarters, R&D centers, sourcing centers, data processing centers Outbound investment platforms 7

8 Overall Policies and Implications What s more? Expanding the financial sector Free convertibility for RMB under capital account Liberalisation of interest rates within FTPZ Permits qualified foreign banks / private capital groups to set up wholly-owned subsidiaries / JV banks. Centralized management for foreign exchange funds; permission for foreign enterprises to participate in future commodity trading; support for host equity trading institutions to establish an integrated financial service platform Optimized Customs supervision Simplified CIQ processes Simplifying the administration process and expanding market access Negative list to clarify national treatments of foreign invested enterprises Simplified procedures for foreign invested enterprises (recordfiling) Simplified approval process for outbound investments Permission for overseas portfolio companies and master funds establishments to invest overseas Relaxation of financial sector Tax incentives Simplified investment administrat ion Recreating the environment for customs supervision New finance and tax policies Overseas shipment into FTPZ without customs clearance until later stage, classified supervision, establishment of demonstration and trading platform for bonded goods Improve logistics efficiency by optimising the customs inspections process and using more efficient risk control and supervision measures. Competitive finance and tax policies to lower operational cost 8

9 What has been achieved so far? The National People s Congress Standing Committee has authorized the State Council to suspend certain administrative approvals items under <PRC Law on Wholly Foreignowned Enterprise>, <PRC Law on Sino- Foreign Equity Joint Ventures> and <PRC Law on Sino-Foreign Cooperative Joint Venture> : The Decision shall take effect from 1 October 2013 for a trial period of 3 years The Decision will suspend the administrative approvals for foreignfunded enterprises, Chineseforeign equity joint ventures and Chinese-foreign contractual joint ventures. The State Council proposed a suspension on <PRC Law on Protection of Culture Relics> in Shanghai FTPZ. But no decision has been made yet. Changes in Corporation Law FTPZ policies formulation status Key guidance have been formulated, but detailed implementation rules are still under discussion. The State Council proposed that market access requirement of the new FTPZ will be stipulated and announced through the form of Negative List ( 负 面 清 单 ), i.e. only prohibited activities will be announced. The operation will be running on a trail basis for a few years and Central Government will decide whether an expansion will be necessary. Customs supervision and forex related policies are expected to be released in the first instance and followed by other areas. 9

10 Possible policies of the new FTPZ In-charge Authority Possible policies (to be confirmed) Policies not likely to be possible Customs Customs supervision treatments may make reference to Hengqing and Qianhai. Registration procedures, timeline and requirement are expected to be simplified. Storage of bonded and non-bonded goods within the FTPZ (i.e. current practice of WGQ FTZ) Export VAT refund for WGQ FTZ (to be consistent with other bonded zones?) The new FTPZ will be upgraded, improved and integrated functions of 4 existing bonded zones (e.g. logistics, testing, repairing, manufacturing, display, refurbishment). Registration of cargo movement between different zones will not be cancelled. Physical fences between different zones will not be removed. Duty-free shopping (similar to Hainan) is unlikely to be implemented. 10

11 Possible policies of the new FTPZ In-charge Authority CIQ Possible policies (to be confirmed) Inspection and quarantine requiring to be conducted overseas may be conducted within Shanghai FTPZ (e.g. preshipment inspection for used mechanical and electronic). More pilot programs are expected to be tested in FTPZ (e.g. remanufacturing, repair etc.) E-declaration of goods inspection would be possibly implemented in Shanghai FTPZ. Certificate of Origin under FTAs (how to determine China local content, and who will issue the CoO, and CoO for RDC). Policies not likely to be possible CIQ will not waive conduct inspection on import animal and plant. Rules and regulations regarding consumer protection will still apply within the new FTPZ. 11

12 Possible policies of the new FTPZ In-charge Authority Possible policies (to be confirmed) Policies not likely to be possible Financial system innovation will be implemented, including: To be explored a) liberalized interest rate b) Free RMB conversion in capital account c) Cross-border use of RMB SAFE Institutional innovation will be implemented, including: exploring the set-up of new types of financial institution and international platform. FTPZ account may be introduced for free Forex conversion and money transfer with overseas account. 12

13 Possible policies of the new FTPZ In-charge Authority Possible policies (to be confirmed) The bonded goods can be traded freely with no turnover tax. Competitive finance and tax policies to lower operational cost Policies not likely to be possible It is unlikely to officially have 15% reduced CIT/IIT rate written in the policy. TAX Preferential policy regarding individual and corporate income tax (e.g. tax refund) might be developed. Details are not available at this stage. Local government may offer financial subsidies that is equivalent to 10% of the CIT taxable income of an enterprise derived from overseas business. IIT refund may also be increased to attract RHQs. 13

14 Example of possible business models I: New model for trade and services Step-in the service sector Benefit from potential finance and tax incentives Explore different possibilities for services inside and outside the FTPZ II: Regional principal and operation centres Integration of trade, logistics and settlement centres Simplified approval and supervision procedures Enjoy finance and tax incentives Customer Supplier Customer Overseas Overseas Shanghai FTPZ Pilot Industry Customer Shanghai FTPZ Regional Principal Non FTPZ? Customer Non FTPZ Customer??? Related Parties Supplier 14

15 Timeline where to next? End of March 2014 Legislation to enact the program End of 2013 Release of all 98 policies July 2013 Release of 56 policies FTPZ scheme approved by the State Council 15

16 Summary messages and future development The Shanghai FTPZ trial will not only benefit the city trading industry but boost shipping, financial, logistics, real estate and information service industry as well. It will help foreign companies by simplifying administrative procedures. Meanwhile, it will also help Chinese companies go overseas by increasing exports. Customs formalities within the Shanghai FTPZ are expected to be so simple and convenient that the entry of goods would possibly only require registration of the good description and value of the goods without any inspection and intervention. Also, there may be no declaration process for goods coming in and out of the zone. From the state level, the new FTPZ in Shanghai will be a precedent for other areas. In the near future, more similar FTPZs will be launched in other cities, which is a signal of broader opening of international trade in China. 16

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