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Slowdown In China's Export Growth Due To Tax Fraud

Mary Swire, Tax-news.com, Hong Kong

15 February 2001

A dramatic slow-down in China's rate of export growth in January is being attributed to the ending of a massive scam in which fake export certificates were being used to reclaim VAT. After a 27.8% increase in exports between 1999 and 2000 to $249bn, January's exports came in at $16.92, up just 0.8% year on year. The trade surplus shrank to $1.375bn compared with Dollars 1.5bn in the same month a year earlier.

While there are some other factors accounting for the slowdown, such as the impact of the Chinese New Year, which fell in January this year, officials say that their attack on the export certificate racket, which began in December and has resulted in the closure of hundreds of export trading companies, is partly to blame.

The scam is quite simple: you bribe local customs officials to issue a fake export certificate, and then reclaim most or all of the 17% VAT paid on the goods you purchased and didn't export. Officials say that they don't yet know the full cost of the frauds, but think that it may well be greater than the $6bn involved in last year's smuggling scandal.

Export certificates are used by Chinese trade authorities to calculate export volumes, which have thus been artificially inflated by the fake certificates.

Most of the fraudulent certificates have emanated from port cities in the southern province of Guangdong, but investigations are going on in eleven provinces. The authorities attribute much of the criminal activity to 'the mafia', but it is not clear whether this expression is anything more than a convenient way of externalising some of the blame for the frauds, which may in fact be due to the corruption of highly-placed officials in the customs and trade administrations.

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