To implement the State Council's requirements that the financial community support the growth of the real economy, provide more conveniences for trade and investment and promote the development of trade in services, the State Administration of Foreign Exchange (SAFE) recently issued the Circular on Printing and Forwarding the Regulations on Foreign Exchange Administration for Trade in Services (Hui Fa [2013] No.30, or the “Circular”), stating that a nationwide reform of foreign exchange administration will kick off on September 1, 2013. To further clarify this reform, the relevant person-in-charge at the SAFE was interview by a journalist.
Q: What is the background of this reform?
A: During the 12th Five-Year Plan period, a critical period in building China into a moderately prosperous society and in promoting the development of the service sector, an acceleration of the development of the service sector is very important to advance the economic restructuring and the upgrading and optimization of the industrial structure. As stated in the 12th Five-Year Plan for the Development of the Service Sector by the State Council, in order to further expand the opening-up of the service sector efforts should be stepped up to rigorously develop trade in services by establishing a promotion system, enhanced laws and improved regulations, and offering more conveniences. The Guidelines of the General Office of the State Council on the Financial Community's Support for Economic Restructuring, Transformation, and Upgrading also state that the foreign exchange administration system for trade in goods and services must be improved by advancing, streamlining, and deregulating foreign exchange administration, with a focus on delivering more conveniences for trade and investment.
The SAFE is seizing this opportunity to initiate a reform of foreign exchange administration in support of trade in services based on in-depth investigations and extensive solicitation of comments and suggestions, with the aim of creating a better policy environment for foreign exchange administration so as to facilitate the healthy development of trade in services.
Q: What are the guidelines for this reform?
A: This reform, as an important part of the reform of institutions and mechanisms for foreign exchange administration, reflects the country's overall requirements for the transformation of the concepts and approaches to foreign exchange administration. First, we will provide more conveniences for foreign exchange transactions via such measures as removing the administrative approvals and streamlining the verification of documents; second, we will transform the administrative model from stressing outflows rather than inflows to balanced administration of outflows and inflows; third, we will replace ex-ante administration focusing on approvals and verifications by ex-post administration stressing monitoring and analysis; fourth, we will replace monitoring each transaction with integrated monitoring focusing on the participants in the foreign exchange transactions. The above measures aim to build a more convenient, regulated, transparent, and efficient system of foreign exchange administration in support of trade in services.
Q: How will this reform benefit institutions and individuals in China?
A: Focusing on promoting the facilitation of foreign exchange administration, this reform will bring greater conveniences to institutions and individuals in terms of foreign exchange transactions for trade in services. Specifically, the benefits are as follows: First, purchases of and payments in foreign exchange for trade in services will be handled by financial institutions without verification. Second, in theory small amounts of foreign exchange receipts and payments for trade in services (equivalent to USD 50,000 or less per transaction) can be handled by the financial institutions without the need for document verification. This will facilitate most trade in services, but it is not applicable if the amount of the foreign exchange receipts and payments for trade in services for each transaction exceeds USD 50,000 or the equivalent in other foreign currencies. Third, the requirements for document verification for some foreign exchange transactions will be simplified, including simplifying and integrating the existing verification rules for dozens of documents, eliminating the verification of most approval and filing documents by the relevant authorities and eliminating the tax certificate requirement for external payments in foreign exchange. Fourth, conditions for overseas deposits of foreign exchange income from trade in services by organizations in China will be loosened, with corporate groups allowed to deposit abroad their foreign exchange from trade in services.
Q: What changes will this reform make to the tax policy for external payments in foreign exchange?
A: The SAFE and the State Administration of Taxation (SAT) jointly issued on July 9 the Announcement of Issues regarding Tax Record Filings for External Payments in Foreign Exchange for Trade in Services (SAT and SAFE Announcement No.40, 2013), jointly determining the program to reform the tax policy for external payments in foreign exchange. According to the announcement, the tax certificates will be replaced by record filings for external payments in foreign exchange, meaning that foreign exchange payers only need to register their payments with the tax authorities before making any payments. The record filing is applicable to payments in excess of USD 50,000 or the equivalent in other foreign currencies.
Q: The new policy canceled the verification of documents for foreign exchange receipts and payments for trade in services in the amount equivalent to USD 50,000 or less per transaction, thereby providing more conveniences for enterprises. What is the basis for introducing this reform measure?
A: This policy is based on the fact that China’s trade in services features frequent and small-value transactions, and USD 50,000 as the cutoff point is set according to the statistics and analysis of foreign exchange receipts and payments for trade in services during recent years. Based on the 2012 statistics, 88 percent of the foreign exchange transactions for trade in services totaled no more than USD 50,000 (or the equivalent in other foreign currencies) per transaction; thus the removal of the document verification for each of these transactions will benefit the majority of enterprises involved in trade in services in China. The remaining 12 percent of transactions associated with trade in services that are subject to document verification by financial institutions account for about 92 percent of the total value of enterprise transactions for trade in services. This approach, focusing on controlling the majority, will help further enhance the efficiency of foreign exchange administration and reduce social costs.
Q: How will this reform influence financial institutions in terms of handling the relevant foreign exchange transactions?
A: Integrating the regulations for foreign exchange administration in support of trade in services will provide a clearer and simpler basis and more conveniences for financial institutions. Streamlining the document verification will help financial institutions reduce their operating costs and improve their operating efficiency. Furthermore, the reform further clarifies the authority and responsibilities of the financial institutions in terms of the verification of their business, strengthens their due diligence responsibilities, and encourages them to improve internal controls and related business processes to prevent abnormal cross-border flows of capital via trade in services.
Q: How will “facilitation” and “risk prevention” be balanced in this reform?
A: Integrating “facilitation” and “risk prevention” is a crucial principle in this reform. While introducing measures to promote facilitation of trade in services, the foreign exchange authorities will strengthen balanced ex-post management, and intensify the monitoring of the inflows and outflows of foreign exchange based on an off-site regulatory system integrating macro analysis, intermediate monitoring, and micro checks established to enhance the ability to identify, predict, and prevent the risks entailed in foreign exchange transactions associated with trade in services. In addition, the focus will be placed on verifying large-value transactions. Institutions and individuals in China are required to keep all the documents for each foreign exchange receipt and payment transaction for trade in services through financial institutions for five years in case of any ex-post checks by the foreign exchange authorities. Due diligence responsibilities will be clarified for financial institutions in terms of the verification of documents so as to raise their awareness to actively abide by the regulations for foreign exchange administration, making sure that facilitation and risk prevention are fully integrated and mutually supportive.
