The phrase “export-related moneys received in advance in connection with trade in goods” refers to the receipt of foreign exchange before the export date specified in a contract, or before the actual export and customs clearance date. Such moneys may be paid in advance by a foreign purchaser to a PRC exporter.
Cooling hot money
In recent years, “hot money” from abroad has entered the PRC through three main channels: the current account, the capital account and underground money changers. To stem this inflow, the government has strengthened exchange controls. In 2008, the Foreign Exchange Administrative Regulations were comprehensively revised, and new exchange control measures imposed. Control was increased over the receipt and conversion of foreign exchange received in advance in connection with goods exported on the current account.
The Administrative Regulations require that receipts and payments of foreign exchange on the current account are linked to a true and lawful underlying transaction. Financial institutions engaging in foreign exchange business are required to verify the genuineness of the transaction documents and their consistency with the foreign exchange receipts or payments made. The exchange control authorities are authorized to monitor this.
Registration of foreign debt
The State Administration of Foreign Exchange (SAFE) has formulated a series of regulations, including measures for foreign debt registration and online checking, in respect of the receipt and conversion of foreign exchange payments received in advance.
The Issues Relevant to Administration of the Implementation of Foreign Debt Registration in Respect of Trade in Goods by Enterprises Notice, issued by SAFE on 2 July 2008, specifies that as a foreign debt, moneys received in advance must be registered. The notice requires enterprises to carry out registration and cancellation procedures for moneys received in advance, via an internet-based trade credit registration management system, as follows:
- When a new export contract contains provisions for the advance receipt of moneys, or money is received in advance despite this not being specified in the contract, the enterprise must register the receipt within 15 working days of the date of the contract or the date of actual receipt of the money.
- Within 15 working days of the receipt of advance moneys, the enterprise must register the withdrawal of such moneys; if moneys are received in advance despite this not being in the contract, the enterprise must register the withdrawal of such moneys at the time it actually receives them.
- If goods for which advance moneys have been registered are cleared through customs and exported, or if the goods are not exported and the foreign exchange is refunded to the foreign buyer, the enterprise must cancel the registration of the advance moneys within 15 working days of the date on which the goods were cleared through customs and exported or of the date on which the foreign exchange was refunded.
- If registration has not been cancelled within 30 days of the export of the goods for which advance moneys were registered, the enterprise must provide a written explanation and supporting documentation to SAFE. If registration has not been cancelled within 90 days of the export of the goods without reasonable excuse and, pursuant to regulations on the administration of foreign debt, the enterprise is determined to have violated regulations on foreign borrowing, SAFE will impose penalties and order the enterprise to refund the advance moneys.
Also on 2 July 2008, SAFE, the Ministry of Commerce and the General Administration of Customs jointly formulated the Online Checking of the Export-related Receipt and Conversion of Foreign Exchange Measures. From 14 July 2008, the foreign exchange received by an enterprise in connection with exports (including moneys received in advance) should first be deposited into an account for the checking of foreign exchange received in connection with exports, opened in the name of the enterprise by the bank.
Once moneys received in advance have been deposited, and need to be converted or transferred, the enterprise must complete an official explanation and submit it to the bank. The bank should then conduct an online check, and convert the foreign exchange or transfer the funds within the enterprise’s quota of receivable export-related foreign exchange.
That quota is set based on the enterprise’s registration of the moneys received in advance and details of the export-related foreign exchange it receives, and the features of the industry in which it operates. In general, an enterprise’s quota is 25% of the total export-related foreign exchange it received during the preceding 12 months. Enterprises in specified industries, such as those that export vessels or large sets of equipment, as well as those that receive foreign exchange in advance from export buyers, may apply to their local SAFE for an increase in their quota.
If a contract is terminated after advance receipt of some or all of the moneys but before customs clearance and export, and the foreign buyer should get a refund, the export enterprise must, pursuant to the Reconciliation of Export-Related Receipts of Foreign Exchange Administrative Measures and their detailed implementing and operational rules, apply to SAFE on the strength of the export contract, proof of termination of the contract or refund and compensation agreement, and the copy for the reconciliation of export-related receipts of foreign exchange or the proof of receipt of foreign exchange issued by the bank. If satisfied that the application is genuine, SAFE will offset the amount against the exporter’s export-related foreign exchange receipts, issue proof of that setoff, and carry out the relevant procedures.
In summary, PRC export enterprises are not free to receive and convert foreign exchange or make refunds and pay compensation in foreign exchange in connection with moneys received in advance for trade in goods. All of these acts must be carried out in accordance with exchange control regulations and are subject to foreign exchange quotas.
Yu Feng is a senior partner at Dacheng Law Offices
Dacheng Law Offices LLP, Shanghai
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