The stricter enforcement of Chinese forwarding regulations could force container lines to turn away business and force forwarders out of the market.
Under the revised rules that took effect Feb. 15, non-vessel-operating common carriers and forwarders doing business in China must obtain a license from the country’s Ministry of Transport. To gain a license, companies must meet various requirements, mostly notably having a registered agent on the mainland and making a sizable deposit.
U.S.-based NVOs and forwarders can pay the deposit of $125,000 to the Federal Maritime Commission, while non-U.S.-based companies must pay a deposit of ¥800,000 (about US$129,498) to a MOT-designated bank, according to a Maersk Line notice to customers. U.S.- and foreign-based companies both have to pay a filing fee of ¥5,000.
With thousands of unlicensed Chinese and foreign forwarders and NVOs exporting freight from the country, container lines worry they will have to turn away business or risk stiff penalties. One carrier suggested the rule could impact 10 percent of its export freight from China.
There is also concern that many NVOs and forwarders are unaware of the stricter enforcement of the rules, which was announced in November. Competition could also diminish because smaller players unable to pony up the licensing fees will be pushed out of the market.
“One of the big issue in China is that some companies are doing NVOCC business without licenses, and they are just borrowing other people’s licenses,” said Shashi Kiran Shetty, president and owner of All Cargo Global Logistics, a global logistics firm based in Mumbai, India.
Authorities in China will shut down the operations of unlicensed NVOCCs and forwarders, seize money gained through illegal transactions and subject the company to fines equaling between two to five times the amount of individual transactions deemed illegal, according to a circular and rules issued by the MOT on Oct. 13. If the unlicensed NVO or forwarder didn’t gain any revenue from a transaction or the gain was less than about ¥100,000, the company will still faces fines between ¥50,000 and ¥200,000, the circular said.
Once licensed by the MOT, NVOs and forwarders are required to file tariffs with the Shanghai Shipping Exchange at least 30 days before implementation. Negotiated rate agreements can take effect 24 hours after being accepted by the SSE. NVOs and forwarders that fail to file tariffs and rate agreements or don’t make timely corrections to filings risk penalties ranging from ¥20,000 and ¥100,000.
The tigher enforcement of maritime licensing comes as second-tier NVOs and forwarders grapple with the implementation of China’s new value-added tax on logistics services. Even though forwarders that don’t sign contracts directly with carriers were supposed to be able to deduct the 6 percent tax from their taxable income, they can’t because Chinese tax authorities apparently haven’t yet caught up with clarifications made by the Ministry of Finance, said Robert Li, tax partner of PwC China and the lead partner of Indirect Tax practice and TMT industry of Central China.
That the Ministry of Finance implemented the clarification as a notice as opposed to an “official document” could also explain why second-tier forwarders can’t take advantage of the credit. The VAT, which allows Chinese manufacturers and logistics providers to claim value-added credits on their taxes, represents an improvement from the 5 percent business tax, which is part of China’s efforts to shift its export-driven economy toward services.
Like the new rules for NVOs and forwarders pertaining to licensing, tariffs and rate agreements, the August implementation of the VAT change has been fraught with confusion and charges that foreign companies couldn’t access the same credits as their Chinese counterparts. Encouragingly, the Chinese government late last year moved to level the playing field by allowing foreign companies shipping companies to deducte the VAT from their taxable income.
But the persistent hiccups on VAT implementation suggest the latest round of regulation will be anything but smooth.
Annie Zhu contributed to this report. She can be contacted at firstname.lastname@example.org.