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Changes for mineral exploration enterprises in the new economic and tax environment - 28 November 2008
The introduction of China’s new economic stimulus package, Value Added Tax regime (“VAT Rules”) and Measures for the Administration of Foreign-invested Mineral Exploration Enterprises (“Mineral Exploration Measures”) signifies a number of changes for the mineral exploration industry, as outlined in this review.
The economic stimulus package
On 10 November 2008, it was announced that the State Council adopted a massive stimulus package including approximately US$586 billion (approximately RMB4 trillion) over the next two years. The key areas of spending include, but are not limited to, the following:
- Rural infrastructure
- Industry
- Transportation
- Housing
- Health and education
With so much funding being injected into these areas over two years, amongst other areas, demand for minerals and mining activities will pick up in order to help supply these projects with the relevant materials. More details on the allocation of funding are expected soon, with legislation scheduled for March 2009.
The new VAT Rules
On 11 November 2008 the State Council issued the Interim Regulation of the People’s Republic of China on Value Added Tax (the new “VAT Rules”). The new VAT Rules take effect from 1 January 2009. The Rules are part of the greater Tax Transformation Plan (“Transformation Plan”).
The new VAT Rules and the Transformation plan will impact the way foreign invested enterprises (“FIEs”) and domestic businesses plan mineral exploration and mining activities. FIEs are no longer able to receive refunds on the purchase of domestically-made equipment, nor can they receive VAT exemptions on imported equipment. This means that entities now taking advantage of these refunds and exemptions need to begin planning on how to structure their operations without them. Implementing regulations, expected in December 2008, are likely to clarify some of these points.
The new VAT Rules, however, do allow fixed assets to be deducted from Output VAT. This will offset some of the effects on FIEs of losing their preferential treatment. Foreign and Chinese entities involved in a mineral exploration Co-operative Joint Venture (“CJV”) need to carefully plan how they use their VAT receipts for equipment purchased and to ensure that there are good practices in place to properly account for such receipts.
The new VAT Rules have also increased the VAT levied on mineral products from 13 per cent to 17 per cent, and so entities will need to consider the impact of this increase in tax liability on their structure.
The Mineral Exploration Measures
The Mineral Exploration Measures were issued by the Ministry of Commerce and the Ministry of Land and Resources on 18 July 2008 and became effective as of 20 August 2008. Although there are no watershed developments, the Mineral Exploration Measures provide clarity on a number of issues for FIEs.
FIEs may obtain an exploration license outside their place of registration and can set up branches
Article 11 of the Mineral Exploration Measures specifically allows FIEs to apply for exploration permits, with such permits not being restricted to the geographical place where the enterprise is registered.
Additionally, if an FIE does obtain an exploration permit in a place other than its place of residence, that FIE shall set up a branch in that place with the administration for industry and commerce.
Sino-foreign CJVs may engage in two or more exploration projects
Under Article 13 of the Mineral Exploration Measures, it makes it clear that CJVs are able to undertake multiple exploration projects. CJVs can also specify separate distribution ratios for the rights and interests of each project.
Separate establishment of a FIE by investors of the CJV
Article 21 explicitly allows for investors of the CJV to establish an FIE which can itself engage in exploration of minerals. Additionally, this FIE can carry out the procedures for the transfer of the exploration rights.
New clearer structure
Tax structuring advantages
Under the Enterprise Income Tax Law the profits and losses of each branch (project) under the above structure can be grouped together for the purposes of determining the taxable income of the CJV. As such, losses from one branch can be offset against the profits of another. These losses can be carried forward and utilised against the income for a subsequent 5 years.
In addition, the Mineral Exploration Measures allow for the investors to specify separate distribution ratios for rights and interest in each project. In the context of tax structuring, partners to the CJV can strategically arrange their distribution ratios for particular projects with a view to their tax liability under the CJV.
Disclaimer
The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law.