Exclusive: Comac denies tax break allegations as US brings WTO case on Chinese aircraft imports

PUBLISHED : Wednesday, 09 December, 2015, 11:07pm
UPDATED : Thursday, 10 December, 2015, 11:25am

China’s aircraft maker Comac has denied it was given tax breaks by the government in breach of World Trade Organisation rules after the United States initiated a WTO case against China’s aircraft import tax.

Washington’s Trade Representative on Tuesday accused Beijing of discriminating against foreign aircraft makers by charging a 17 per cent value-added tax on imported airplanes lighter than 25 tonnes but not applying the same VAT to domestic aircraft. The US requested consultations with China on the issue, the first step of a process that could lead to trade sanctions.

The allegations come after China last month made its most substantial progress in aircraft manufacturing when its first self-developed Comac C919 narrowbody jet completed its assembly phase and the smaller ARJ21 regional jet, a sub 25-tonne product, entered service.

“China’s discriminatory, unfair tax policy is harmful to American workers and American businesses of all sizes in the critical aviation industry, from parts suppliers to manufacturers of small and medium-sized aircraft,” said a statement from the US Trade Representative.

READ MORE: After 13 years, China’s home-grown Comac ARJ21 passenger jet enters commercial service

China’s Ministry of Commerce did not respond to a faxed request for comment on the US statement.

Jeff Cheng, a Comac spokesman, told the South China Morning Post: “We do not have any comments on the statement, but all of Comac’s market transactions, including our sales of planes and our import of parts and components from our overseas suppliers are subject to strict regulation and relevant taxes.”

The US Trade Representative said its investigators uncovered documentation of tax exemptions offered by Beijing to domestically made planes dating back to 2000, which Beijing did not publish for review by trading partners in violation of WTO transparency commitments. It said the discovery did not come from any US industry players.

Mainland legal and aviation analysts said the US argument had little grounds for support and resembled its past attempt to thwart the rise of Europe’s Airbus by initiating trade disputes.

“To charge value-added tax on imported goods is not against any WTO rules. All imports into China are subject to the import VAT; that is a domestic tax item, not tariff,” said Yao Weiqun, associate president at the Shanghai WTO Affairs Consultation Centre. “If Comac pays the same import VAT for parts it gets from its foreign suppliers, then the point of unfair tax break also does not stand,” he said.

Both the C919 and the ARJ, which are the intellectual property of China, have overseas suppliers providing key components such as engines and avionics, and the US is the country with the most number of suppliers for Comac.

Wang Yanan, a Beijing-based aviation expert, said the sub-25 tonne aircraft market is not one that Boeing is involved in. However, other US manufacturers of smaller planes, such as Gulfstream, Cessna and Cirrus, are dominant in this sector. “General aviation in China is a big market the US firms are eyeing. This moves shows the US reluctance to accept China’s aerospace manufacturing role.”

Yu Dan, a professor at East China University of Political Science and Law, said the WTO battle between the US and EU over subsidies for Boeing and Airbus has dragged on since at least 2004 to no avail.

Paul Jebely, global head of aviation finance at law firm Clyde & Co, said the US trade enforcement challenge via the WTO was a legitimate reaction to the perceived threat of China’s new role as a plane maker competing with the likes of Boeing for the Chinese domestic market. “It is not unexpected. The WTO is the correct forum to resolve the dispute, whether through the bilateral consultations that will follow or, failing which, actual panel hearings before the WTO arbitrators,” he said.

“What will be most interesting to me is how China and ultimately the WTO respond to the allegations that the discriminatory tax practises in question were ‘hidden’.”