WTO & CEPA

The WTO is a multi-lateral agreement with 148 member countries and regions, including Taiwan and Hong Kong. The WTO consists of a Multilateral Agreement on Trade in Goods including the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and Trade-Related Aspects of Intellectual Property Rights (TRIPS). In addition, it contains a Dispute Settlement Understanding.

The CEPA is a two-party bilateral agreement entered into between the Central People’s Government and the Government of the Hong Kong Special Administrative Region as per Article 24 under the General Agreement on Tariffs and Trade (GATT), and Article 5 of the General Agreement on Trade in Services (GATS). The scope of the 6 annexes of the CEPA covers trade in goods, trade in services, trade and investment facilitation. Issues on trade-related intellectual property are not covered.

The WTO came into being in 1995. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in 1947, and modified in 1994.

The two sides first signed the CEPA on 29 June 2003, and then signed the 6 annexes to CEPA on 29 September 2003.

First, CEPA provides for the elimination of the tariff on 273 types of Hong Kong made goods to be exported to the Mainland of China with effect on 1 January 2004. Second, CEPA provides for the opening up of 18 service sectors in the Mainland to Hong Kong service providers ahead of the timetable China commits to the WTO member countries and regions. Third, Annex 6 of the CEPA also provides for a framework for trade and investment facilitation between the two sides.

In respect of the Hong Kong made products, the scope of the CEPA is not restricted to the above 273 types of above-mentioned products, the scope will expanded to cover other types of products by 1st January 2006. In respect of the service sector, the Chinese Central People’s Government will open more service sectors to Hong Kong service providers by 1st January 2006, in addition to the existing 18 service sectors. The CEPA is not the finishing point. Rather it is the start of an ongoing process in which the scope and contents will be continuously widen and enlarged.

There are two broad categories. One is obtained from inside Hong Kong territories including natural resources, Hong Kong raised animals, plants and vegetables grown or collected inside Hong Kong, and the fishery catches from Hong Kong registered vessels operating in the high seas. The other category is the products which are not wholly obtained inside Hong Kong, but they are subject to substantial transformation in Hong Kong.

Annex 2 of the CEPA provides for three definitions: First, it provides that the existing origin rules shall apply to the 187 (68%) of the product codes. Second, Annex 2 adopts the “Change in Tariff Heading” (CTH) approach to 46 (17%) product codes. Third, Annex 2 specifies the “30% value-added requirement” for 40 (15%) product codes.

No, it is required to meet one of the definitions to be a Hong Kong product.

The requirement adopts the following formula: -
Local cost contents / FOB value X 100%, or alternatively
(Cost of materials and parts + local direct labor cost + expenses incurred in product development) / FOB value X 100%;
If the percentage value is over 30%, the product satisfies the value-added requirement.

Product development refers to product development carried out in Hong Kong for purpose of producing or processing the exporting goods. Development expenses incurred should be related to the exporting goods. These expenses include fees payable for the development of designs, patents, patented technologies, trademarks or copyrights carried out by the manufacturer himself, fees payable to a natural or legal person in Hong Kong for undertaking development of those rights, and fees payable for purchasing these rights owned by a natural or legal person in Hong Kong. The fees should be clearly identifiable under generally accepted accounting principles and the requirements of “Agreement on Implementation of Article VII of the GATT 1994”.

No, there is no provision to exempt the VAT and the consumption tax on Hong Kong product enjoying zero-rated tariffs in the CEPA. The PRC VAT Tentative Regulations and PRC Consumption Tax Tentative Regulations do not specifically exempt the imported Hong Kong products enjoying zero-rated tariffs either.

The Industry and Trade Department is responsible for vetting and issuing the CEPA Certificate of Origin. In addition, 5 non-government organizations (NGO) are authorized to issue the same under Chapter 343 of the Hong Kong Law. Those NGOs include the Hong Kong General Chamber of Commerce, Indian Chamber of Commerce Hong Kong, the Chinese Manufacturers' Association of Hong Kong, the Federation of Hong Kong Industries, and Hong Kong Chinese Chamber of Commerce.

Annex 5 of the CEPA provides for two categories of Hong Kong service providers: natural persons and juridical persons. Natural persons are permanent Hong Kong residents, and juridical persons include companies, partnerships, and sole proprietorships, trade associations and chamber of commerce who are legally formed under the Hong Kong laws.

With the exception of the legal service sector, a Hong Kong juridical person including a Hong Kong company must meet the following five criteria:

1. Its scope of business must encompass the services it intends to provide in the Mainland of China;
2. It must have been engaged in substantial business operations for 3 years (5 years for construction companies, insurance companies and banks);
3. It must have more than 50% of their staff who are residents in Hong Kong without any limit of stay;
4. It must have paid profit taxes in Hong Kong;
5. It must have evidence of owning or renting a business premises commensurate with its scale of operations.

It is not specifically given in the CEPA annexes whether a weighted average headcount method will be used to calculate the numbers and thus compute the ratio of Hong Kong employees to total employees. It is expected that the detailed calculation method will be announced later.

The CEPA does not state that Hong Kong employees have to work in Hong Kong. But CEPA requires that the employer must file to the Inland Revenue Department the “Employers’ Return of Remuneration and Pension of Employees” and keep the copies for record.

The intended service provider should produce the following documents to the Industry and Trade Department to apply for a certificate as the Hong Kong service provider:

1. Copy of Certificate of Incorporation issued by the Companies Registry;
2. Copy of Business Registration and an Extract of information on the Register of Businesses;
3. Audited financial statements for the past 3 years (or 5 years);
4. Original or copy of documents substantiating the owning or renting of business premises in Hong Kong by the Hong Kong service provider;
5. Copy of profits tax returns and Notice of Assessment and Demand for tax for the past 3 years (or 5 years as the case may be);
6. Copy of Employer’s Return of Remuneration and Pensions in respect of the employees of the Hong Kong service provider;
7. Original or copy of documents substantiating that more than 50% of the company employees are residents of Hong Kong as defined;
8. Original or copy of documents substantiating the nature and scope of the Hong Kong service provider;
9. A Statutory Declaration by the authorized representative of the Hong Kong service provider.

The acquired Hong Kong Company will have to wait for one year before it can submit its application for certification as the Hong Kong service provider.

The Annexes and CEPA itself do not specifically deal with this issue. We have to wait for further elaboration from the two sides on this.

The Hong Kong service provider should provide identification of his or her Hong Kong permanent resident status, and for Chinese citizens among such service providers, they should provide the Home Visit Permit or the HKSAR passport. In addition, they should provide copies of statutory declarations, identification document of the natural person, and documents of Business Registration, Profit Tax Returns, and evidence of owning or renting business premises. All of them must be attested by an attesting officer as recognized by the Mainland.