Import and processing trade regime in China allows a domestic factory to purchase raw materials from abroad and export finished products to global markets. Under the jinliao jiagong model, the Chinese manufacturer takes full ownership of the imported materials and is responsible for the entire production process and the subsequent sale of the goods. This trade arrangement is often referred to as the import for export model because the materials are brought into the country specifically to be transformed into higher value products for international buyers.
The manufacturer must use its own foreign exchange to pay for the materials and is entitled to the profits from the final export sale. This system is a major component of the Chinese manufacturing sector and has helped the country become a leading global exporter of industrial and consumer goods.
Ownership of the raw materials and the final products remains with the Chinese factory throughout the entire manufacturing cycle. In the jinliao jiagong arrangement, the manufacturer acts as a commercial entity that buys inputs and sells outputs on the international market. This differs from other processing trade models where the foreign client retains ownership of the supplies.
The factory is responsible for all the costs associated with the purchase of materials, including freight, insurance, and any applicable taxes. Because the manufacturer owns the goods, it has the freedom to choose its suppliers and to negotiate the best prices for its inputs. This flexibility allows the company to optimize its supply chain and to improve its profit margins by adding value through efficient production.
The model is particularly attractive to large scale manufacturers with strong financial resources and a broad international customer base.
Oversight of this trade regime is conducted by the local customs bureaus through a system of digital handbooks and bonded accounts. Jinliao jiagong requires the manufacturer to register the planned imports and exports with the customs authorities to receive a tax exemption on the raw materials. The materials are imported into a bonded status, meaning that no import duties or value added taxes are paid as long as the finished products are eventually exported.
Customs officials track the volume of materials imported and compare them against the volume of products exported using established consumption standards. These standards define the amount of raw material required to produce a single unit of the final product, accounting for normal waste and scrap. If the company fails to export the required amount of finished goods, it must pay the deferred taxes and duties on the remaining materials.
Management of foreign exchange and the settlement of international payments are governed by the rules set by the state administration of foreign exchange. Under the jinliao jiagong model, the manufacturer must use its own foreign currency reserves or purchase currency from a bank to pay for the imported materials. When the finished products are exported, the revenue must be brought back into China and reported to the authorities to balance the company’s foreign exchange account.
This process ensures that the trade activities do not lead to an unauthorized outflow of capital from the country. The manufacturer also benefits from certain tax incentives, such as the refund of value added tax on the value added during the processing phase. These financial arrangements help to lower the overall cost of production and make Chinese exports more competitive in the global market.
Maintaining accurate financial records is essential for complying with these regulations and for securing the continued support of the tax and customs authorities.
Corporate transfer pricing adjustments that alter finished assembly prices retroactively trigger severe customs duty debits on sub-tier processing trade imports.
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