2 March, 2016
In an effort to promote the development of processing trade, the State Council issued the Certain Opinions on Promoting the Innovative Development of Processing Trade (“Opinions on Promoting Processing Trade”).
The Ministry of Commerce (“MOFCOM”) issued the Circular on Notification of Catalogue for the Guidance of Major Development Areas of Service Outsourcing Industry, to notify the public of the Catalogue for the Guidance of Major Development Areas of Service Outsourcing Industry (“SOI Catalogue”) with a notification period ending January 27.
On January 25, 2016, Singapore International Arbitration Centre (“SIAC”) announced the opening of a representative office in the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”).
1. State Council issued the Opinions on Promoting Processing Trade
Processing trade is an integral part of China’s foreign trade, however, as production costs have increased, the traditional development model has become more difficult to sustain, threatening China’s competitiveness. Under such circumstances, the State Council issued the Opinions on Promoting Processing Trade to promote innovative development of processing trade on January 4, 2016.
1.1 Background
On August 2, 2011, the MOFCOM, the Ministry of Human Resources and Social Security and the General Administration of Customs, in cooperation with the People’s Government of Guangdong Province, decided to develop national processing trade transformation and upgrading demonstration areas in Pearl River Delta region, with the goal of accumulating experience for transforming and upgrading processing trade.
Later, the MOFCOM together with other authorities issued the Opinions for Guidance of Promoting the Transformation and Upgrading of Processing Trade on November 29, 2011, in which 19 opinions were highlighted to promote the transformation and upgrading of processing trade, including one opinion urging processing factories to register as enterprises with legal person status.
The Opinions on Promoting Processing Trade follows previous opinions on the matter to promote the transformation and upgrading of processing trade, and brings up the opinion of innovative development for the first time.
1.2 Legal Review
Highlights of the Opinions on Promoting Processing Trade include:
a) Further open the services sector, encourage foreign-invested enterprises to establish procurement centers, allocation centers and settlement centers in order to develop “headquarter economy”.
b) Promote processing enterprises’ production model of Original Equipment Manufacturing (“OEM”) to be transformed into production models of Original Design Manufacturing (“ODM”) and Own Branding and Manufacturing (“OBM”).
c) The current definition of “processing trade” does not cover ODM and OBM. Processing trade refers to the business activity of importing all or part of the raw and auxiliary materials, parts and components, and packaging materials from abroad, processing or assembling the finished products in China, and exporting these products. It includes processing with supplied materials and processing with imported materials. ODM generally refers to the production arrangement under which the manufacturers are engaged by the purchaser to provide product design services, as well as manufacture the products under the purchaser’s label. OBM generally means the manufacturers manufacture products under their own labels. The meaning of ODM and OBM have exceeded the current definition of “processing trade”. To promote the transformation of a production model of OEM into ODM and OBM, the definition of “processing trade” needs to be adjusted.
Facilitate the integration of processing trade and service trade, encourage processing enterprises to engage in research and design, inspection and maintenance, logistics and delivery, financing and settlement, distribution and warehousing, and other outsourcing services.
d) Comprehensively promote administrative approval system reform for processing trade, reinforce supervision during and after the processing trade business activities, and improve the supervision model.
With authorization by the Standing Committee of the National People’s Congress, the State Council has suspended granting approvals for processing trade services, and bonded imported materials for processing trade or domestic sale of finished products within Guangdong Province since 2013, with a suspension period of 3 years. The State Council has demanded that Guangdong Province summarize their experiences of abolishing granting approvals for processing trade services and the domestic sale of finished products in order to comprehensively promote the process of administrative approval system reform for processing trade. We expect the approval requirements on processing trade services and bonded imported materials for processing trade or domestic sale of finished products will be abolished nationwide.
e) Actively participate in negotiation of bilateral rules, promote and lead the formulation of regional, bilateral and multilateral international economic and trade rules, and create a fair international economic and trade environment for processing trade.
1.3 Next Step
The Opinions on Promoting Processing Trade establishes development guidelines for processing trade. The State Council and government authorities of commerce, customs, inspection, tax and foreign exchange will review and amend current processing trade legislation based on the Opinions. The future legislation amendments on processing trade and the reform of administrative approval system will be monitored.
2. MOFCOM’s Notification of SOI Catalogue
To carry out the Opinions of the State Council on Promoting Further Development of Service Outsourcing Industry, the MOFCOM notified the public of the SOI Catalogue on January 20, 2016, with a notification period from January 21 to January 27 of 2016.
2.1 Background
On December 24, 2014, the State Council issued the Opinions of the State Council on Promoting Further Development of Service Outsourcing Industry and put forward 16 opinions regarding promotion of the service outsourcing industry, including regular issuance of the SOI Catalogue, to strengthen the guidance to the service outsourcing industry. The State Council instructs that the MOFCOM shall take the lead, and Ministry of Finance and General Administration of Customs shall participate in issuing the SOI Catalogue at a regular intervals.
The MOFCOM, along with with other relevant authorities, conducted research and issued the first version of the SOI Catalogue, notifying the public on January 20, 2016.
2.2 Legal Review
The SOI Catalogue covers 23 key development areas, among which, 10 areas are related to information technology outsourcing (“ITO”) (this includes services such as cloud computing, integrated circuit and electronic circuit design, software technology, software research and development, information system operation and maintenance, basic information technology operation and maintenance, e-commerce platform, information technology solutions, new energy technology solutions, and information technology consulting); 5 areas are related to business process outsourcing (“BPO”) (including such services as professional business services, data processing, internet marketing and promotion, supply chain management, and human resources management); and 8 areas are related to knowledge process outsourcing (“KPO”) (including industrial design, data analysis, medical and biotechnology research and development, inspection and testing, new energy technology research and development, cultural and creative services, engineering technology, and management consulting services).
The SOI Catalogue contains detailed rules on the definition, scope, classification, major business types and major application of each area.
According to the Catalogue for the Guidance on Foreign-invested Industries (Revised in 2015), provision of outsourcing services in conducting management and maintenance of system application, information technology supporting management, banking back office services, financial settlement, software development, offshore call center, data processing and other information technology and business process outsourcing services are classified as “encouraged” foreign-invested services. Foreign investment in outsourcing industry will further benefit from the Implementation of the SOI Catalogue.
2.3 Next Step
Before notification of the SOI Catalogue, the MOFCOM and other relevant authorities issued the Standards for Recognition of Technologically Advanced Services (Trial) on October 8, 2014 which sets out the standards in determining whether enterprises located in Beijing, Shanghai, Guangzhou and 18 other service outsourcing demonstration cities in China are eligible for enterprise income tax incentives. Since neither the State Council nor the MOFCOM has clarified the application of the SOI Catalogue, it is worth noting whether this Catalogue will replace the Standards for Recognition of Technologically Advanced Services (Trial), the entry requirements for enterprises to provide services specified in this Catalogue will be relaxed, and enterprises providing the previously mentioned services will be eligible for preferential treatment including international service outsourcing industry guidance fund, financing, customs clearance, and foreign exchange administration.
3. Launch of SIAC’s representative office in the Shanghai FTZ
On January 25, 2016, the SIAC announced the opening of a representative office in the Shanghai FTZ. On January 19, 2016, SIAC’s Shanghai representative office was registered with Shanghai Administration of Industry and Commerce as a resident representative office of a foreign enterprise.
The launch of SIAC’s Shanghai representative office underpins SIAC’s steadily growing popularity among various Chinese parties and shows its continuous efforts to forge closer ties with Chinese companies and lawyers in the international arbitration community throughout Mainland China. SIAC’s Shanghai representative office will work with mainland Chinese arbitration commissions to promote the development of international arbitration in the Mainland and global best practices, by organizing training workshops and networking events for arbitrators and legal practitioners.
3.1 Background
On April 8, 2015, the State Council issued the Circular on Issuing the Plan for Further Promoting the Reform and Opening-up of the China (Shanghai) Pilot Free Trade Zone (“Opening-up Circular”), supporting the introduction of internationally renowned commercial dispute resolution institutes to the Shanghai FTZ. Following the Opening-up Circular, SIAC becomes the second international arbitration institution to launch its representative office in the Shanghai FTZ, after Hong Kong International Arbitration Centre (“HKIAC”).
3.2 Legal Review
The issuance of the Opening-up Circular and the Launch of representative offices of SIAC and HKIAC are important signs of further opening-up of Chinese arbitration services to foreign arbitration institutes. Due to their professionalism and neutral position, renowned foreign arbitration institutes have become Chinese parties’ preferred choice in resolving China-related disputes. However, there are uncertainties as to whether SIAC can administer arbitral proceedings held in the Mainland and whether awards from such proceedings are enforceable in China.
China did not commit to open the market of commercial arbitration services in Mainland China to foreign arbitration institutes in the Protocol on the Accession of China; and in Article 10 of the Arbitration Law, places eligible for the establishment for arbitration commissions do not include areas outside China. It is noteworthy that on March 25, 2013, the Supreme People’s Court issued the “Reply on Request Regarding Validity of Arbitration Agreement following the Application Made by Anhui Longlide Packaging Printing Co., Ltd. and BP Aganti S.R.L”, in which the court took the view that where the arbitration agreement contains representation made for arbitration, scope of arbitration and appointed arbitration institutes, it is legally valid for parties to agree that the disputes shall be heard at a venue in Mainland China and be administered by foreign arbitration institutes. This Reply clarifies the validity of arbitration agreements by foreign arbitration institutes administering arbitration proceedings held in the Mainland, while leaving out the issues of nationality of awards from such proceedings and enforcement unsolved.
3.3 Next step
According to arbitration rules of SIAC, hearings in SIAC-administered arbitrations do not have to be held in Singapore. However, SIAC’s Shanghai representative office as a resident representative office of a foreign enterprise, does not have an independent legal personality under Chinese law, is only allowed to conduct services promotion and information collection activities and cannot provide direct case administration services. If Chinese companies wish to choose SIAC as their arbitration institute, the case will still be administered by SIAC's Secretariat in Singapore. Therefore, if Chinese companies wish to choose SIAC as their arbitration institute, it is uncertain whether the hearings for arbitration are allowed to be carried out in Shanghai. Based on our inquiries, HKIAC indicated that parties should seek legal advice before requesting HKIAC to administer arbitral proceedings held in the Mainland and advised that Hong Kong is a preferable venue for China-related disputes. Based on this information, we understand that SIAC, HKIAC and other foreign arbitration institutes are uncertain as to whether they can administer arbitral proceedings held in the Mainland and whether awards from such proceedings are enforceable, with a wait-and-see attitude.
For further information, please contact:
Catherine Miao, Partner, Jun He
miaoqh@junhe.com
