BEIJING -- For years, China imposed stiff taxes on imported cars - as high as 100 percent on some. Meanwhile, imported parts were taxed at a lower rate. So automakers sidestepped the higher taxes by importing parts, then putting the parts together here.
Now, the government is closing that loophole with new tax regulations. Automakers are crying foul.
"These measures will make it more difficult for auto manufacturers relying on kits to compete in the local market as their imported parts will be subjected to a higher import tariff," says Paul Gao, principal with consultants McKinsey & Co. in Shanghai. "The auto manufacturers who will suffer are those with small volume for whom localization does not make economic sense."
New models typically are assembled from imported kits. That allows automakers to test the market response to the model and to build up a local supply base. The practice also allows automakers to sidestep the high taxes on imported vehicles.
The new policy, which becomes effective Friday, April 1, redefines what is considered a complete car import.
The new policy would affect a vehicle assembled in China that has a certain number of imported systems - such as the body and engine. The entire car would be thrown into the higher tax category for imported vehicles. It will be taxed at the current 30 percent rate levied on imported vehicles rather than the 15 percent rate for imported parts. The imported vehicle tax rate will fall to 25 percent in mid-2006, as called for in China's World Trade Organization agreement.
China has kept its pledge to the organization to lower tax rates on imported cars and components. The rate for complete vehicle imports is down 75 percent from a few years ago. The tax rate on imported components also has fallen each year for the past few years, as scheduled. It will drop to 10 percent in mid-2006.
But the new policy is a "step back" from China's pledge to decrease tariffs on imported components, says Dominik Declercq, chief China representative for the European Automobile Manufacturers Association.
It is also "a veiled way of pushing for greater local content," he says. China said it would drop requirements for cars to have a certain percentage of locally made parts or face higher tax rates.
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