this activity has received funding from austrade as part ... · china-australia free trade...

Audit | Tax | Advisory | Financial Advice

This activity has received funding from Austrade as part of the

Free Trade Agreement Training Provider Grant Program.

The views expressed within the activities are not necessarily the

views of the Commonwealth of Australia, and the

Commonwealth does not accept responsibility for any

information or advice contained herein.


China-Australia Free Trade Agreement (ChAFTA)

Crowe Horwath Australia 25 September 2017


Agenda

3

Overview of Free Trade Agreements (FTAs)

Overview of China-Australia Free Trade Agreement (ChAFTA)

Steps to Utilizing ChAFTA

Tariff Classification Identification

Treatment of Goods

Rules of Origin

Preparation of Origin Documentation

Government Schemes

Tax Structuring

Tax Matters


Overview of Free Trade Agreements (FTAs)

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FTAs can cover:

Entire regions with multiple participants

Just two economies

FTAs are international treaties that remove

barriers to trade

Increased economic integration between

participating countries


How businesses can use FTAs

Increase goods exports to a market;

Commence new goods exports to a market;

Demonstrate that goods are eligible for FTA benefits;

Deepen engagement in global value chains;

Achieve efficiencies through cheaper imported inputs;

Harness new or more secure access to services markets;

Better the mobility of business travel;

Invest with enhanced protections and certainty;

Access government procurement markets; and

Address 'behind the border' barriers to trade.

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China-Australia FTA (ChAFTA)

China is Australia's largest agriculture, forestry and fisheries export market

Worth circa $10B in 2015-16, up from $5 billion in 2010-11

China predicted to account for 43% of global growth in agricultural demand by 2050.

Prior to ChAFTA Australian producers and exporters faced significant tariffs on agricultural

products, placing them at a competitive disadvantage to countries with established FTA ties to

China.

An example of how ChAFTA will benefit exporters:

All tariffs on agricultural products will be progressively eliminated

Elimination of the 11 to 30% tariff on oranges, mandarins, lemons and all other citrus fruits by

1 January 2023

Elimination of the 10 to 30% tariff on all other fruit by 1 January 2019

Elimination of the 10 to 13% tariff on all fresh vegetables by 1 January 2019.

6


Steps to Utilizing ChAFTA

WHAT

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Nature of the goods are being

imported/exported

Identify the correct customs tariff code 1.

2.

3.

4.

Treatment of the goods under ChAFTA

Identify the lower (preferential) duty rate for the goods HOW

‘Origin’ of goods – are the goods

‘produced’ in Australia or China WHERE

Type of documentation required to certify origin of

goods

Certificate of Origin (COO)

Declaration of Origin (DOO)

DOCUMENT


Tariff Classification Identification

Classification

Treatment of a particular good depends on the correct Harmonized System (HS)

tariff identification

Access to tariff schedules:

Importers into Australia – Schedule 3 of the Customs Tariff Act 1995

Exporters to China – tariff schedule of the Chinese Customs Service

Advance rulings

Importers

Exporters

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Treatment of Goods Under ChAFTA

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Both China and Australia have set out their commitments to reduce duty rates on goods in lists,

called tariff schedules.

Both countries’ tariff schedules can be found in ChAFTA Chapter Two, Trade in Goods: Annex I

– Schedule in Relation to Article 2.4 (Elimination of Customs Duties).

Exporters

There are also two special categories relating to tariffs which will be eliminated over 10 or 12

equal annual stages, but where a special agricultural safeguard may apply.

Category D

Quota of Australia wool exports

Importers

Vital to check Australia’s tariff schedule


Rules of Origin Requirements

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Rules prevent goods from a

third party being transhipped

through either China or

Australia to take advantage of

the FTA.

Goods will be considered

as ‘originating’

if...

They meet Product Specific Rules

(PSRs)

They are Wholly

Produced Goods

They are Wholly

Obtained (WO) Goods


Rules of Origin – Transit Through a Third Party

A good will be considered ‘originating’, despite being transported through a third

country, if the goods meet a range of conditions including:

Not having undergone any operation other than

Unloading, reloading, storing, repacking, re-labelling, splitting up for transport reasons

Or any operation necessary to preserve the goods in good condition to be transported on to

China or Australia.

The goods are not stored temporarily in a transport hub for longer than 12

months

The goods remain under Customs control

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Other Important Rules of Origin

Imports into Australia:

For goods transhipped through a third party into Australia, including Singapore

and Hong Kong, Australia will not require any specific additional documentation,

other than the commercial documentation ordinarily required.

Exports into China:

Articles 14 and 15 of China’s Customs Decree 228

Hong Kong Customs and Excise Department has established a China Free Trade

Agreement Transhipment Facilitation Scheme to assist implementation of China’s

transhipment arrangements under FTAs.

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Preparation of Origin Documentation – COO

Certificates of Origin (COO)

Applies to a single shipment

Must not exceed 20 items per shipment

Valid for one year

Must be issued by an authorized body

Exporters to China – Australian authorized bodies:

The Australian Chamber of Commerce and Industry (ACCI);

The Australian Industry Group (AIG); and,

The Australian Grape and Wine Authority (AGWA) (for wine and wine-related products).

Importers into Australia – Chinese authorized bodies:

General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ)

The China Council for the Promotion of International Trade

These authorized bodies have COO templates

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Preparation of Origin Documentation – DOO

Declarations of Origin (DOO):

May be accepted in place of a COO for goods covered by an advance ruling on ChAFTA

origin

Completed by the exporter of a good

No need for DOOs to be approved by an authorized body

Applies to a single shipment only

May cover up to 20 items per shipment

Valid for one year

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Other Documentation

Record Keeping:

Exporters or producers must maintain all records necessary to demonstrate a goods’ origin

for three years after signing a COO, or longer.

Exporters or importers into Australia should note that records must be retained for five years

and can be retained in hard copy or electronic format.

Waiver of Certification:

For certain goods, Australia and China have waived requirements for COOs and DOOs

where total customs value is below AUD 1,000 or RMB 6,000

Verification

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Government Schemes – Exporters

Government grants and trade initiative schemes

In order to overcome non-tariff barrier challenges of international trade, or to assist with

entrance into new markets, the government has a number of trade-related initiatives

which further complement FTAs and assist with companies competitiveness in existing

and new Export markets, such as:

The Australian Trusted Trader Program (ATTP)

Export Market Development Grants (EMDG)

Efic Small Business Export Loan

State based – eg Export Skills Development QLD

Research & Development incentives

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Tax structuring – the starting point

What do you want to do/achieve?

Commercial/business considerations must be the starting point

Where is your product/service is on the business life cycle

What is needed to make sales in China

How much is it going to cost to set up and operate

Legal requirements both for the business and in China

What is the medium-longer term goal – keep or exit

Other considerations

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Tax structuring – the starting point

What do you want to do/achieve? cont

But don’t forget about the tax issues

Expect any foreign tax paid to be a “cost”

Different structures have different tax implications

Must understand Chinese local tax laws and obligations

Double tax agreements – note Australia/China DTA does not extend to Hong Kong

Do you need a full blown presence from day one?

Different structures have different set up and operating costs

No “one size fits all” – so recommend specialist advice before proceeding

Caution – changing structures is likely to have tax implications

How the business is to be funded – eg equity and/or debt, local or foreign …

Exit strategies

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Tax structuring – options

Typical Australian outbound investment structures

Export directly from Australia

with no physical overseas presence

with Representative Office

use an independent agent/distributor

Branch/Permanent Establishment (Australian entity = legal entity)

Separate legal entity – eg set up a subsidiary company in foreign country

Other structures may be suitable – eg trusts, limited partnerships – but care needed!

China encourages wholly foreign owned enterprise (“WFOE”) and cooperative joint

ventures

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1. Export directly from Australia – no physical presence overseas

Cost efficient – no/limited overseas costs, no foreign tax

Tax compliance generally limited to Australia and typically simple

Future development of cross-border tax rules may increase tax compliance complexity

Big question – is this possible? Answer generally “NO”

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2. Export directly from Australia – with Representative Office

Aim – not to create a “Permanent Establishment”

Thus restricted from direct profit making activities

conduct marketing and other non-transactional operations - “preparatory or auxiliary”

cannot conclude contracts

Not a separate legal entity (Australian entity = legal entity)

Generally inexpensive option as limited activities and no foreign tax

but will have obligations for employees / dependent agents

China – from January 2010 new restrictions on the use of representative offices including:

the Australian company must have been in existence for at least 2 years (rules out

SPVs)

limited to four representatives

no longer exempt from China’s enterprise income tax (“EIT”) and an Increased risk of

business tax and VAT on certain taxable earnings

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3. Export directly from Australia – use independent agent / distributor

Aim – not to create a “Permanent Establishment”

Cost efficient – don’t need own foreign entities/registrations, no foreign tax

Distribution agreements with independent agent / distributor

Pay commissions/fees to independent agent / distributor

Care to ensure not “dependent agent” (if so, will create Permanent Establishment)

Tax compliance generally limited to Australia and typically simple

Future development of cross-border tax rules may increase tax compliance complexity

Independent agent / distributor – carries on business of providing such services,

provided such activities are not devoted wholly or almost wholly to one client/enterprise

Dependent agent – a person, other than an independent agent, who often has the

authority to conclude contracts on behalf of the enterprise (includes employees)

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4. Branch / Permanent Establishment

Not a separate legal entity (Australian entity = legal entity)

Requires registration as a foreign entity

Subject to tax in foreign country tax costs and compliance obligations

If active business generally not assessable in Australia and therefore no franking credits

on such profits

Requires allocation of income and expenses to branch – broadly mirroring transfer pricing

methodology of arm’s length principles

Caution – exposure of Australian entity’s profits to tax in foreign country

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5. Local company / entity incorporated in foreign country

Requires set-up of new entity and registrations – recommend specialist advice

Often invest direct – eg Japan and Korea

Could consider an interposed entity – eg via Hong Kong for China

Subject to tax in foreign country tax costs and compliance obligations

Ring-fences foreign subsidiary’s operations from Australian holding company

Generally commercially better accepted in local country

Increased flexibility raising equity or local financing

Care needed to keep “residency” in foreign country – “effective management”

Care needed if Australian employees in foreign country

Sale of shares potentially tax-free

NOTE: the after-tax return to shareholders will often broadly be the same as under a

branch/permanent establishment if foreign company dividends profits to shareholders –

however, always best to get professional advice up-front!


Tax Matters for Exporters

Australian tax considerations

Thin capitalisation

Controlled foreign companies (CFC) rules

Could tax on accruals basis (as opposed to NANE)

No franking credits for foreign taxes = unfranked dividends for shareholders

Transfer pricing / Branch attribution

Exit strategies including availability of CGT relief for certain foreign subsidiary companies

FBT issues from foreign benefits to Australian tax resident employees

China tax considerations

Understand domestic tax laws and obligations including:

Registration requirements / obligations

Various taxes that may apply

Lodgement and payment dates

China/Aus Double Tax Agreement – how modify domestic tax laws

Repatriation of profits – procedures and withholding taxes

Exit issues – tax on disposal

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Tax Matters for Exporters – summary

Foreign taxes – expect to be a “cost”

Structure – no one size fits all

Design for commercial reasons, tweak for tax efficiencies

Different structures have different costs and tax obligations

Understand the structure implemented and limits/restrictions

Making changes to the structure will have tax implications

Tax registrations and on-going compliance obligations

Domestic law and DTA modifications

Understand the regulatory obligations for foreign investors

Overseas activities will have Australian tax implications

Be careful in sending Australian employees overseas for extended periods

Due to the complexities involved, get professional advice

– getting it wrong or not complying can be expensive and painful!

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Andrew Curdie – Associate Partner – Licensed Broker

Customs & International Trade – Sydney

Tel +61 2 9619 1608

Mobile +61 434 622 715

[email protected]

"I bring to Crowe Horwath a wealth of knowledge from working in all parts of Customs and International Trade with an extremely broad

range of clients.“

Andrew’s specialty is Customs and International Trade. He brings to this position over 35 years experience in the customs industry,

managing leading customs brokerages where he consulted with clients on all levels including Tariff, Quarantine and GST matters.

Andrew has extensive experience managing customs risk and obtaining substantial savings across a wide range of industries including:

electronics; textiles, clothing and footwear; food; manufacturing; raw materials; medical; cosmetics; and automotive; as well as experience

in 3PL warehouse and distribution.

Key Areas of Expertise

Minimising duty exposure through preparation and lodgement of Tariff Concession Orders, Tariff Advices, and Valuation Advices

Unbundling of Customs Value – delivering subsequent duty reduction

Transfer Pricing methodology of overseas pricing, in line with Customs Valuation legislation

Customs Compliance – utilising our Three-Staged “Global Trade Optimiser” approach

Trusted Trader – assisting clients to become accredited with the Australian Government initiative

Supporting Importers in all areas of logistics including purchasing, stock control, international freight options & monitoring supply chain

activities creating net value

Professional Background

Licensed Customs Broker

Department of Agriculture (Quarantine) accredited Broker

Member of the Customs Brokers and Forwarders Council of Australia (CBFCA)


Richard Nutt – Associate Partner

Customs & International Trade – Sydney

Tel +61 2 9619 1607

Mobile +61 409 906 302

[email protected]

“The Tax Advisory group’s Customs and International Trade experts aim to reduce the incidence of customs duty in a client’s business, producing instant

cash savings and real margin improvement for the future of the business.”

Richard brings to his clients his extensive prior experience working as an Industrial Engineer and Customs Broker for FedEx in organising supply chain &

logistics industry in various countries including Australia, New Zealand, Ireland and United Kingdom, and more recently at Crowe Horwath as a consultant

specialising in Customs & International Trade.

Clients and Expertise

Richard has experience of working with Australian and New Zealand regulatory bodies (Customs and Quarantine) as well as working with clients within

automotive, perfume & cosmetics, electronics and retail industry. Using his experience as an Industrial Engineer and Customs Broker, he is able to add

significant value to Department of Immigration and Border Protection (DIBP) industry advisory groups relating to trade facilitation initiatives. His industry

experience and commercial skills has also enabled him to achieve outstanding outcomes for his clients, most significantly helping reduce costs and risk

within the supply chain operations via operational improvements or reducing amount of customs duty paid on imported goods.

Key Areas of Expertise

Customs Duty Reduction via:

Unbundling of Customs Value

Recall and Warranty parts re-engineering to ensure compliance with bylaws that enables Duty Free Imports

Tariff Concession Order Scheme

Transfer Pricing in relation to Customs Valuation

Customs Compliance – via our Global Trade Optimiser (GTO) service offering

Trusted Trader Program – Government backed initiative aimed to improve trade facilitation

Operational Planning and Labour Resource Management

Process Improvements within Customs Clearance or Warehouse and Supply Chain Operation

Design, Development, Implementation including EDI interfacing of software with Customs in Australia, New Zealand and Asia


Trevor Pascall – Senior Partner

Tax Advisory – Brisbane

Tel +61 7 3233 3507

Mobile +61 409 124 105

[email protected]

Trevor is a Senior Partner, Tax Advisory, Crowe Horwath Brisbane with lead tax responsibilities for Queensland, Northern Territory and

northern NSW and a member of the Crowe Horwath National Tax Leadership Team. He is a senior tax professional with over 30 years

taxation experience.

Trevor brings a complete range of tax advisory services to all clients, large and small. As a highly respected tax advisory specialist, Trevor

has significant, extensive knowledge in cross-border and international tax issues for both outbound and inbound clients.

Professional Affiliations

Fellow – CPA Australia

Chartered Tax Adviser – The Tax Institute

Registered Tax Agent

Education

Bachelor of Commerce (University of New South Wales)

Masters of Tax (ATAX, University of New South Wales)


Our service offering

Disclaimer

Crowe Horwath (Aust) Pty Ltd is a member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath is a separate and

independent legal entity. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of

financial services licensees) in each State or Territory other than Tasmania. ABN 84 006 466 351.

Findex Advice Services Pty Ltd trading as Crowe Horwath Financial Advice is not a member of Crowe Horwath International.

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this activity has received funding from austrade as part ... · china-australia free trade...

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