Tax problems could slow the bid for pole position

Anti-dumping measures are under consideration by the European Commission in the wake of a massive inflow of Chinese made shoes after the lifting of import quotas by the EU at the beginning of 2005. As if this was not enough to contend with, their own import regulations which are aimed at cutting back raw hides and skins imports in order to relieve the pollution burden of processing them within China, are causing tanners real financial hardship. On the surface, the declared aim of the government is very laudible. They want to cut down pollution in the country and have identified the tanning industry as one of the more obvious offenders. Their solution has been to levy taxes against tanners with the aim of encouraging them to shut their beamhouses and, in future, import wet-blue or crust. On the face of it, this would seem a very sensible move. However, the financial implications are far-reaching and given the sheer size of the Chinese tanning industry, where is the capacity to wet-blue or crust the required volume of hides and skins? Besides, it would be naïve to think that the central government, or any other government in the world for that matter, thinks only in the interests of its people. The main motivation is to clamp down on tax evasion which has been common practice and this is a sure fire way of raising huge amounts of tax cash. In reality, the scheme does little to lighten the pollution burden. Why? Because the major tanneries, often foreign-owned or joint-ventures, have all invested heavily in waste treatment plants. The worst polluters are the small domestic tanneries who use mainly local raw materials and so are not required to pay import taxes in the first place. In the past importing tanners have been able to defer both VAT payments and import taxes on their consignments of raw materials, which only become liable for payment against exports once they have been processed and re-exported either as finished leather or as finished goods. With the new system, tanners have to pay 5% import tax and 17% VAT on import, a huge 22% when before they were required to pay nothing at that stage. Once goods have been re-exported, the tanners are able to claim back a 13% VAT refund. But how long will that take? Imports of wet-blue on the other hand, if destined for re-export, will continue to enjoy the advantages of deferred payment. Under this scheme, they are only required to pay the difference in VAT between 17% and 13% (4%) on export. Even if they re-export, raw hide importers pay 5% import duty and can only reclaim 13% VAT giving a 9% advantage to importers who buy in wet-blue for re-export. And if they do not re-export, they lose the lot. However, this is not the only financial disincentive of the new import regulations. If tanners switch to wet-blue imports, the simple fact is that it costs more to wet-blue hides in the US, a major hide exporting country, than it does in China. The Chinese government stands to do very well out of the new regulations. VAT has, in the past, been shared between the state and provincial governments. In the future the VAT return paid out after re-export is to be paid out by the provincial government only. The implication of this is that in a province which exports a large volume of leather, such as Guangdong, the local government could have to pay out more in refunds than they received when the goods were imported. The central government is the silent winner. The new regulatory scheme could prove to be a huge financial reward for the state government as not only has it raised the taxes, it has closed the loopholes by which tax avoidance has been endemic. Eight Chinese shoe makers are reported to have set up an alliance in south China's Guangdong Province. Their aim is to encourage the country's shoe manufacturing industry to act in unison in response to the EU anti-dumping investigation into China-made shoes. The companies have stated that it is unfair for the EU to reject their applications for market economy status. 'There is no direct consequence between some EU shoe makers' losses and China's shoe export to EU countries following the end of the global quota system on January 1, 2005. Chinese shoe makers oppose the EU's unfair anti-dumping probe', says an announcement by the alliance. The European Commission opened a probe into possible dumping of Chinese shoes into the 25-member EU in June 2005. Since then, 130 Chinese shoe manufacturers have been charged by the EU as being responsible for dumping. Among them, 13 firms were ordered to respond to the sample investigation in the EU's intensified anti-dumping probe. 'Seven of the 13-probed firms are Guangdong-based companies with investment from Hong Kong and Taiwan', said Chen Qingyan, general manager of the Wanbang Shoe Manufacturing Co, which is one of the seven firms. He said that the alliance will call for help from all of China's 1,300 shoe manufacturers, which together employ four million workers, to take counter-measures against any unfair practices from the EU side. Wu Zhenchang, another initiator of the alliance and chairman of the board of the Chuangxin Group said that the association has hired international trade lawyers to prepare representation documents, for submission to the European Commission, when its members visited China for talks over the trade row in February. China-made shoes under the EU's anti-dumping probe are now valued at US$730 million, according to statistics collected by alliance members (Source: People's Daily, Beijing, through Xinhua News Agency, February 9, 2006).