China: First "zero-tariff" product list for Hainan free trade port

China: First "zero-tariff" product list for Hainan

Chinese government authorities released the first “zero-tariff” product list for the Hainan free trade port.

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With the creation of the free trade port, the entire Hainan island is effectively a customs bonded area, where raw and auxiliary materials imported by registered independent legal person enterprises can be exempted from import duty, import value added tax (VAT), and consumption tax. The imported materials must be used in the importers’ own manufacturing activities and processed for sale to overseas markets.

Customs duty and tax exemptions

In June 2020, the Chinese central government announced plans for the Hainan free trade port. Ultimately a zero-tariff rate will apply to a broad range of imports into Hainan island, which will be treated as a special customs bonded area. A simplified tax system (e.g., consolidation of various turnover taxes into a single “sales tax”) will also apply. Prior to this whole-island regime coming into effect, certain categories of imports have been entitled to import duty, import VAT, and consumption tax exemptions.

China’s Ministry of Finance, the General Administration of Customs, and State Administration of Taxation in November 2020 jointly released a notice that effective 1 December 2020, implements these exemptions.

KPMG observation

To some degree, the notice breaks with the traditional customs supervision model using special customs supervision zones and bonded importation for the processing trade. The notice clarifies that the zero-tariff treatment for raw and auxiliary materials will be subject to a catalogue system, and sets out a list of 169 items with their 8-digit HS Codes. This covers agricultural products (e.g., coconuts, barley, etc.), industrial raw materials (e.g., ores, coal, petroleum oil, liquified natural gas, wood, etc.), chemical raw materials (e.g. xylene, methanol, etc.); preformed-bars for drawing optical fiber; and base-metal mountings, parts and components used for repair of aircraft and vessels (including repairs of relevant parts and components).

The notice benefits agricultural processing, industrial manufacturing and energy enterprises by reducing their operational and capital costs. The "zero tariff" policy for parts and components used for repairing aircraft and vessels will also benefit the development of the aviation industry, aircraft repair industry, vessel repair industry, and the relevant processing and assembly industries.

In parallel, some compliance requirements are also set forth in the notice. This requires that raw and auxiliary materials benefiting from zero-tariff rates must only be used for production by the importer in Hainan free trade port and be subject to customs supervision. They cannot be transferred within or outside the island. If transfer is required as a result of bankruptcy and other reasons, customs pre-approval must be obtained and taxes must be paid. If goods processed and manufactured with the zero-tariff raw and auxiliary materials are sold within the Hainan island or to mainland China, the import duty, import VAT, and consumption tax must be paid, and domestic VAT and consumption tax will also be applied. This treatment, therefore, requires enterprises to plan ahead on the usage and flow of the materials ahead of importation. If the imported materials are for domestic sales, enterprises need to declare to customs and pay the relevant duty/VAT.

In addition, enterprises can also apply to the customs authorities to voluntarily pay the relevant import VAT and consumption tax at the time of importing the listed raw and auxiliary materials. As such, businesses need to consider their business models and the overall tax burdens of the supply chain to judge the application of the preferential tax treatment.

The notice emphasizes the use of information technology to supervise risks and illegal activities. It remains to be seen whether the regulatory authorities would issue scrutiny rules for imported goods. Businesses need to continue to watch for future releases. 

What’s next?

The notice may be a substantial benefit for enterprises in the Hainan free trade port. Enterprises both inside and outside the Hainan free trade port may need to pay attention to the following issues:

  • Enterprises outside the Hainan free trade port need to evaluate the feasibility of establishing a platform company/regional headquarters with functions such as import and export trading, investment and financing, and logistics/supply chain management, so as to improve overall operations including investment, taxation, customs and trade.
  • Enterprises inside the Hainan free trade port need to assess the relevant preferential tax policies and regulatory requirements of the free trade port, and whether to take full advantage of the preferential policies for the imported goods on the basis of compliance.
  • Imported equipment and transportation for an entity’s own use are not included in the current “zero-tariff” product list. Separate lists regulate imported production equipment for an entity’s own use; therefore, imported transportation means for operation as well as the imported goods for consumption within the Hainan island may be expected.  
  • The relevant government bodies are expected to adopt a dynamic adjustment to the “zero-tariff” product list. This may provide an opportunity for businesses to express their concerns and make suggestions to the list. 


For more information on this topic or to learn more about KPMG’s Trade & Customs Services, contact:

Doug Zuvich | (312) 665-1022 | dzuvich@kpmg.com

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