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CIRCULAR OF THE GENERAL OFFICE OF THE STATE COUNCIL ON ISSUING THE PROPOSALS OF THE STATE ECONOMIC AND TRADE COMMISSION AND OTHER DEPARTMENTS ON FURTHER IMPROVING THE BANK GUARANTEE ACCOUNT SYSTEM FOR PROCESSING TRADE

    The Proposals on Further Improving the Bank Guarantee Account System for Processing Trade, submitted by the State Economic and Trade Commission, the Ministry of Foreign Trade and Economic Cooperation, the General Administration of Customs, the Ministry of Finance, the State Administration of Taxation, the People's Bank of China, and the State Administration of Foreign Exchange, has been approved by the State Council and now are hereby transferred to you for implementation and fulfillment.

Appendix: Proposals on Further Improving the Bank Guarantee Account
System for Processing Trade (March 26, 1999)

    The bank guarantee account system for processing trade, which has been
implemented since 1995, has played active role in regulating the management
of processing trade and promoting healthy development of processing trade.
Processing trade has now become an important part of our foreign trade,
playing an import role in exploiting our labor resource advantage, enlarging
export, increasing employment, attracting foreign capital, and promoting the
development of local economy. In order to perfect the management of
processing trade, maintain the normal processing trade order, prevent and
attack smuggling, tax evasion and foreign exchange evasion in the veil of
processing trade and other illegal acts, proposals on further improving the
bank guarantee account system for processing trade are hereby put forward as
follows:

    1.Put management into practice according to the classification of commodities in the processing trade.

    In accordance with the requirements of the industry policy of the State, optimize commodity structure of processing trade step by step; direct processing trade to the orientation of high technology and high extra value.

    Based on the commodities, classify processing trade into three types: the banned, the limited, and the permitted.

    (1) the banned type refers to commodities of which the import is prohibited by the Foreign Trade Law of the People's Republic of China and on which the Customs cannot conduct bond supervision.

    (2) the limited type refers to commodities whose imported materials or parts of which the prices at abroad and at home are different greatly and difficult for the Customs to supervise.

    As for the processing trade of limited commodities, "actual transferring"
of the bank guarantee account system should be applied. That is, except type
"A" enterprises defined by this text, when other enterprises engaged in
processing trade import restricted parts and materials, the customs should
collect surety as tariffs and import value-added tax, and return the surety
with interest to enterprises after they fulfil the processing within the time
limit and transact the procedure of cancel after verification.

    (3) the permitted type refers to the other commodities not included in the banned and limited types. Except type "C" enterprises defined by this text, the current system of "null transferring" should be applied to the permitted type.

    The commodities catalogue of managerial classification of processing trade should be determined and adjusted at due time by the State Economic and Trade Commission together with the Ministry of Foreign Economy and Trade Cooperation and the General Administration of Customs, and promulgated by the Ministry of Foreign Economy and Trade Cooperation.

    2.Apply classified management to enterprises engaged in processing trade.

    Enterprises engaged in processing trade are classified into four types: type A, type B, type C, and type D. The lists of enterprises of type A, C, and D are determined by the General Administration of Customs together with the Ministry of Foreign Economy and Trade Cooperation, and promulgated by the Ministry of Foreign Economy and Trade Cooperation. Dynamic management should be applied to management of the lists of enterprises classification, and the lists should be adjusted at due time. The enterprises of type B will not be listed out.

    (1) type "A" enterprises refer to bonded factories which are authorized by the General Administration of Customs and supervised by the Customs-sent personnel who station at the factories and which engage in processing trade according to law and have no record of rule-breaking acts of smuggling, or to enterprises which engage in processing trade of special industries such as of airplanes, ships, etc. The imported materials and parts used for processing trade by type A enterprises are supervised by the Customs, and the bank guarantee account system is not applied to them.

    The bank guarantee account system is not exercised in the processing trade conducted by enterprises in bonded areas, the Measures for Customs Supervision in Bonded Areas are implemented.

    (2) type B enterprises refer to enterprises which are engaged in processing trade according to law and have no record of rule-breaking acts of smuggling, the existing system of "null transferring" should continue to be applied to type B enterprises.

    (3) type C enterprises refer to enterprises which are confirmed to have committed some rule-breaking acts by the Customs in accordance with the relevant provisions of the Ministry of Foreign Economy and Trade Cooperation and the General Administration of Customs. As for type C enterprises, the actually transferring of bank guarantee account is applied. The customs should collect guarantee on the imported materials and parts for processing trade equals to the amount of import tax and import value-added tax that should be imposed.

    (4) type D enterprises refer to enterprises which are confirmed to have committed the acts of smuggling or not less than three times of rule-breaking acts by the Customs. As to type D enterprises, in addition to the handling by the Customs according to law, the competent department of foreign economy and trade should suspend their operations rights of processing trade. As to enterprises with foreign investment, the competent department of foreign economy and trade should notify the Customs to suspend their import and export business for one year.

    As for the enterprises engaged in commissioned processing business, the classification principles and management measures thereof are implemented by reference to the provisions in this Part.

    3.The management of "actual transferring" of bank guarantee account

    Enterprises engage in processing trade of which the imported materials and parts belong to the type of limited commodities and type C enterprises should, when handling bank guarantee account according to provisions,  deposit the guarantee into the designated account opened by the Customs in the Bank of China. After the enterprise has proceeded and exported its products and undertaken the procedure of cancellation after verification within the stipulated time limit, the Bank of China should, on the basis of the notice of account cancellation issued by the Customs, undergo the procedure of refund of guarantee, and calculate and pay interest according to the interest rate of current deposit. Where an enterprise does not export the products or sell the products in domestic market upon approval, the Customs should timely notify the Bank of China to transfer the guarantee and its interest into tax and interest of deferred tax.

    4.Strengthen the management of processing trade at different localities.

    As for processing at different Customs territories, the operation unit of processing trade should closely contact the competent department of foreign economy and trade as well as the competent Customs at the place where the processing and producing enterprise is located, and should be strict in checking the factory and in the management of contract registration and record.

    As for the processing trade in the form of commissioned processing, the operation unit must sign a commission contract of processing with the processing and producing enterprise. The operation unit should not sell the imported materials and parts with bond to the processing and producing enterprise, otherwise, it should be punished according to the relevant provisions of the Customs Law of the People's Republic of China.

    When the operation unit commissions a type C enterprise to process, the Customs must collect corresponding amount of guarantee from the operation unit and then undertake the record of contract. The operation unit should not commission type D enterprises to process.

    5.Restrain the management on changing factory to further process.

    (1) when the processing trade enterprises transact the business of further processing and then exporting with the bonded commodities which have been carried froward, the enterprises should abide by the provisions on classified management of commodities, apply for the verification from the competent department of foreign economy and trade. After obtaining the verification, the enterprises may go to the Customs with the verifying document and undergo the procedure of carrying forward, the Customs then apply strict supervision with bond according to the approval document of the competent department of the foreign economy and trade.

    (2) as for limited commodities and those which type C enterprises need to further process in another factory, the Customs should supervise them according to the approaches applied in transportation between different territories or computer-net management. If transportation between different territories or computer-net management cannot be realized, the Customs will collect guarantee equaling to tax for forwarding and further processing of bonded commodities.

    (3) As for the business of forwarding and further processing, the involved enterprises may settle accounts in a similar way as that of export and import trade, and undergo the procedure of paying exchange when importing and receiving exchange when exporting as well as cancellation after verification.

    6.Further perfect protection mechanism of pursuing tax payment.

    If the enterprises engaged in processing trade establish bank guarantee account for the first time, they must provide basic account number and certification of the bank where they opened their accounts. Conversely, they must preserve basic account number. When the enterprises are pursued tax payment from caused by rule-breaking acts, the Customs will draw up the notification of detention and send it to the bank where they opened their basic accounts. The banks concerned must co-operate with the Customs to detain tax in accordance with the Law of the People's Republic China on Tax Collection.

    7.Strictly control the act of domestic sale of the processing trade.

    The finished products of processing trade should be re-exported, and should not enter domestic market. If for some particular reasons the products need to be sold at home market or used to produce domestically sold commodities, the matter must be reported to the competent department of foreign economy and trade next higher the original approving organ of contract. On the basis of the approval document of the competent department of foreign economy and trade, the Customs should collect tax and tax interest of the imported materials and parts according to the provisions of the State, the term for calculating interest begins from the declaration date on which the materials and parts are imported and ends at the date of paying tax in arrears. If the imported materials and parts are the commodities under the administration of import quota license or registration, the operation unit should submit authentication or import authorization for domestic sale or producing domestically sold commodities. If the unit cannot submit such an authentication within the term of cancellation of verification, apart from the due tax and tax interest, the customs will impose a fine, which is more than 30% of the value of the parts and materials imported and less than 100% of them. The enterprises, which are engaged in domestic sale of the bonded parts and materials imported or the processed products with no authentication, should be handled according to the Customs Law of the People's Republic of China.

    8.Formulate the standards for wasting, strengthen cancellation after verification by the Customs.

    The General Administration of Customs and the State Economic and Trade Commission should, together with the relevant industry bureaus of the State, formulate and promulgate in batches the uniform national wasting quota standards for imported commodities of processing trade, which are to be used as the basis for examination, approval and supervision as well as cancellation after verification of the number of the imported parts and materials. The competent department of foreign economy and trade must examine and approve of the contracts of processing trade (including the business of carrying forward the products and further processing) according to the standards, the Customs must cancel after strict verification according to the standards.

    9.Reinforce the co-ordination between departments and execute comprehensive management.

    Processing trade is easily influenced by policies; it involves many links. The relevant competent departments should co-operate closely, and realize the interconnection of computer system among department in the examination and approval, recording and cancellation after verification in relation to processing trade. An inter-ministry meeting for processing trade should be set up by the State Economic and Trade Commission, together the Ministry of Foreign Trade and Economic Cooperation, the General Administration of Customs, the Ministry of Finance, the State Administration of Taxation, the People's Bank of China, the State Administration of Foreign Exchange and the Bank of China, which will regularly exchange information and study policies, so as to do a good job in the administration of processing trade.

    The contracts for processing trade, which have been approved by the competent department of foreign economy and trade and been recorded by the Customs before the issuance of this Circular, should be implemented according to original provisions of the bank guarantee account system.

    The relevant competent departments should formulate specific administration measures respectively according to the above-mentioned proposals, and put them into force as of June 1, 1999.