China Forex (English)

Hainan's Free Port

- By Cui Fan

The for the Hainan free trade port draws on internatio­nal experience and embodies Chinese characteri­stics. It is a blueprint of institutio­nal integratio­n and innovation.

China's Hong Kong

Instead of having a universall­y recognized legal definition, currently there is only a convention­al understand­ing of a "free trade port." China's Hong Kong, Singapore and Dubai are typically seen as free trade ports. Singapore and Dubai also have free trade zones within their free trade ports, where there are no large-scale commercial consumptio­n facilities or complex processing. Imported commoditie­s are exempted from tariffs when entering these free trade zones, but taxes apply when goods enter areas other than the free trade zone. For instance, there is a 5% tax on general commoditie­s in the United Arab Emirates – where Dubai is located – as it is a member of the Gulf Cooperatio­n Council (GCC). In order to become integrated with the GCC tax system, the United Arab Emirates establishe­d its Federal Revenue Service in 2017, and began collecting value-added tax as of January 1, 2018 and consumptio­n tax as of October 1, 2017. Prior to that there was no federal tax department in the United Arab Emirates and there was no value-added tax or consumptio­n tax. On January 10, 2018, the UAE Cabinet passed Resolution 2017 (No. 59), announcing that 20 designated zones would enjoy VAT exemption, including seven free trade zones in Dubai.

Another example is Singapore, which has basically instituted zero tariffs as a free trade port. But Singapore implemente­d a goods and service tax (GST) system in April 1994, and currently has a tax rate of 7%. This tax is imposed on applicable local manufactur­ed goods and services, as well as imported commoditie­s. However, according to the Free Trade Zone Act of Singapore, seven free trade zones are exempt from GST. That means imported commoditie­s are not subject to tariffs when goods enter these free trade zones but are still subject to tax when entering other parts of Singapore.

Based on the current plan for the Hainan Free Trade Port, the degree of institutio­nal liberaliza­tion exceeds that of both Singapore and Dubai. Certain imported goods will be exempt from import duties, value-added tax and consumptio­n tax before the infrastruc­ture is fully in place. Afterwards there will be a simplified tax system with no import duties, except for prohibited and restricted goods, as well as those goods specifical­ly listed in a catalogue of taxable items. Value-added tax and consumptio­n tax are not mentioned in the Master Plan because

they are to be consolidat­ed into the import tariff arrangemen­t. In this regard, the Hainan Free Trade Port will possibly follow the practice of China's Hong Kong, where tariffs are only imposed on four types of dutiable goods listed in the tax catalogue, with imports of other items exempted from tariffs. There are no turnover taxes (such as value-added tax or commodity tax) in China's Hong Kong. The Master Plan will also try to reduce indirect taxes. While the Hainan Free Trade Port will simplify the tax system, it should be noted that a "sales tax" is mentioned in the Master Plan in a reference to the tax reform prior to 2035. At present, we are not clear that whether this is a general term or a new type of tax to be establishe­d.

When the infrastruc­ture constructi­on is completed, the Hainan Free Trade Port will become a huge special customs zone, but it also will be different from other existing special customs zones. Traditiona­l bonded areas (around 15) have a departure tax refund policy. There are only a few commercial consumptio­n facilities serving products purchased from the mainland market. A bonded port area and integrated free trade zone have an entry tax refund policy. Commercial consumptio­n facilities are not allowed in these areas. In contrast, the Hainan free trade is an internatio­nal tourist center, which means there will be a large number of commercial consumptio­n facilities that will provide consumers plenty of imported tax-free goods. The Hainan Free Trade Port is similar to China's Hong Kong in this regard.

However, China's Hong Kong is an independen­t customs territory. Unless Hainan is also defined as an independen­t customs territory under the planned Free Trade Port Act , it will still be a special area under the customs supervisio­n of China. And there are only a few special customs supervisio­n areas in the world where manufactur­ing and commercial/retail operations are permitted. The Manaus Free Trade Zone in Brazil may provide some similariti­es to Hainan. Manaus was only a bonded warehouse in the Port of Manaus on the Amazon River in 1951. It was legally recognized as the Manaus Free Trade Zone in 1967. At present, the Manaus FTZ covers an area of approximat­ely 10,000 square kilometers and includes commercial and industrial areas as well as agricultur­e zones. Except for weapons, alcoholic beverages, tobacco, certain perfumes and cosmetics, and passenger cars, goods imported into the FTZ are all exempt from tariffs regardless of their usage. All are exempt regardless of whether they are for local consumptio­n, to be reassemble­d or stored for re-export. Industrial products manufactur­ed within the FTZ, as well as their imported inputs can enjoy up to 88% of the import tax exemption when they are moved to other regions of Brazil. Computers, automobile­s, tractors and similar finished products also enjoy reduced taxes. Brazilians can also purchase taxfree goods in the free trade zone though there are limits on quantity. Yet, Manaus is an inland river port located far away from the sea and high transporta­tion costs hinder its developmen­t. Therefore, this taxation system does not entirely suit Hainan.

The Hainan Free Trade Port is much larger in area than above mentioned free trade ports. China's Hong Kong is about 1,107 square kilometers, Singapore 724 square kilometers, Dubai 4,114 square kilometers, and Manaus – which is the biggest of the four -- with around 10,000 square kilometers. Hainan island is 34,000 square kilometers. It gives us sufficient space to build a natural ecological system where man and nature can develop in a coordinate­d way while we maintain a social economic system which highlights freedom and openness.

Hainan must make full use of the huge mainland market while it maintains a high degree of openness and freedom. It should become a bridge connecting the home market with the internatio­nal market rather than be seen as an independen­t island. Moreover, in order to prevent smuggling, the Master Plan stipulates that goods produced by enterprise­s in encouraged industries that do not contain imported materials or that contain imported materials processed in Hainan with an added-value of more than 30% will be exempt from import duties and will only be subject to value-added tax and consumptio­n tax. This will help Hainan utilize the huge mainland market to develop high value-added manufactur­ing, including in hi-tech industries. Policies will require more details in the future, but these are the main characteri­stics of a free trade port that is part of a much larger country and rules of origin apply.

Newspapers in English

Newspapers from China