Understanding China's processing trade requirements

Processing trade is one of three main types of trade within China, along with general trade and bonded warehouse trade. It involves domestic firms importing raw materials or other intermediate inputs from abroad, before processing them in local manufacturing facilities. The finished value-added goods are then exported and may not be used for domestic consumption.

A key benefit of processing trade is that organizations are exempt from customs duties on any imported items, including raw materials, auxiliary materials, parts, accessories or packaging, provided that the final goods these items are used to produce are then exported.

Processing trade has become a major part of China's trade strategy since the rules were first introduced in the 1970s. In 2021, official figures from the country's General Administration of Customs showed processing trade value increased by 11.1 percent compared with the previous year, reaching a total of RMB8.5 trillion ($1.27 trillion). This accounted for 21.7 percent of the country's total foreign trade volume.

In order to take advantage of the reduced tariffs that are offered for processing trade, organizations are required to prepare a registration handbook and obtain approval from the Chinese customs authority in advance.

This handbook should contain details regarding the materials that will be imported, what finished goods they will be used to produce and the consumption rate, meaning the net weight or composition ratio of each raw material that will go into one unit of the finished product. It is vital that these materials are correctly categorized in order to maintain compliance with local import rules.

Once approved, this documentation must be maintained until the end date of the activities, recording each import/export based on the clearance and subtracting the quantity of materials consumed for production in the handbook. After the approved amount of exports have been completed, the handbook and other supporting evidence will need to be submitted to customs for verification. 

Customs authorities will examine the declaration to ensure compliance. This includes:

• Ascertaining that imported materials align with import contracts.
• Confirming that the quantity of produced goods matches the amount of imported materials.
• Ensuring that any losses of materials reported are reasonable.

If authorities are satisfied, customs duties and VAT may not be imposed. However, in the event there are discrepancies, there may be major consequences. Penalties for serious violations - defined as avoiding at least RMB500,000 (approximately $70,000) of tax - may include fines of up to five times that of the tax evasion amount, or between three and ten years of imprisonment.

Ensuring that firms remain in compliance with these rules can be a highly complicated process, and manual solutions can be time-consuming and prone to error. This requires importers and exporters to create master lists of data, connect feeders that can update regularly wherever goods are produced and exported, and create an e-manual to collate and declare the data.

Therefore, it pays to have an advanced software solution that can handle all of a firm's customs obligations in a single platform. The ability to automate import and export declarations, easily track the progress of raw materials and finished goods and manage handbook registration and updates greatly streamlines the process.

In turn, this reduces the risk of error and ensures all organizations are paying the correct amount of customs duties on imports and exports to and from China.

To ensure such compliance MIC offers a MIC-CUST® module specifically tailored to the chinese market. This Chinese specific software solution supports processing trade together with an efficient inventory management. Moreover, it also enables automated import declarations as well as automated export declarations that meet the requirements of the Chinese customs authority.