NPCSC Session Watch: Foreign Investment, Patent, Resource Tax, Local Government Debt & More

The 13th NPC Standing Committee (NPCSC) will convene for its last session in 2018 from December 23 to 29, the Council of Chairmen decided on Friday. This session is another of those end-of-year, week-long NPCSC sessions that we have come to love (and definitely not hate). We counted 14 legislative bills plus several more decisions and reports on the agenda. And there is absolutely no festivity-related reason why we would rather not work around that period. Because we expect six of those bills to pass on December 29, we will publish summaries of them after the session concludes rather than in this session preview. Here is our rundown on the agenda.

Legislation

The draft amendment to the Rural Land Contracting Law [农村土地承包法] returns for its third review—which we predict will also be its last.

Both the draft Farmland Occupancy Tax Law [耕地占用税法] and draft Vehicle Acquisition Tax Law [车辆购置税法] return for their second round of deliberations. Brief summaries of their first public drafts can be found here. We expect both to pass at the upcoming session.

Also scheduled for a second round of deliberations are the draft revisions to the Judges Law [法官法], the Procurators Law [检察官法], and the Civil Servants Law [公务员法]. Because a pilot reform of the civil service system will expire at the start of 2019, we expect the Civil Servants Law revision (which will codify the reform) to pass at the upcoming session. The other two draft revisions are also likely to pass, although we would not rule out the possibility of a third and final review in early 2019.

The final two returning bills are the two parts of the draft Civil Code on contracts and tort liability, respectively. As we explained before, the Civil Code—consisting of the General Provisions of the Civil Law [民法总则] enacted by the NPC in March 2017 and the Separate Parts first reviewed by the NPCSC in August 2018—will be submitted in its entirety to the 2020 NPC session for adoption. In the next 15 months, the NPCSC will review one or more (but not all) parts of the Code at a time, likely to start with the ones that seem less contentious, like the two parts it will consider later this month.

That brings us to the six new bills.

To start, the State Council submitted the long-awaited Foreign Investment Law [外商投资法] that will completely overhaul China’s legal regime on foreign investment. A previous draft of the Law (then titled “外投资法”) was released by the Ministry of Commerce nearly four years ago. A central feature of the draft is to generally accord foreign-invested enterprises (FIEs) pre-establishment national treatment—that is, to treat FIEs no less favorably than domestic enterprises in the making of new investments. National treatment is unavailable, however, when FIEs intend to invest in industries on a so-called “negative list,” in which case either government approval is required or investment is outright barred, depending on the industry. (The NPCSC has already provided a legal basis for this “pre-establishment national treatment with a negative list” scheme when it amended China’s three current foreign investment laws in 2016.) The draft also included detailed rules on national security review and reporting obligations.

The draft defines “foreign investors” as foreign individuals, enterprises established under foreign law, foreign governmental entities, and international organizations. That term also includes any Chinese domestic enterprise under the actual control of a foreign investor—exercised, for instance, through contractual arrangements, despite the latter’s lack of a majority voting interest. Variable interest entities (VIEs), a type of business structure based on such arrangements, will thus come within the purview of the Law. Any VIE under actual foreign control cannot then freely invest in restricted or prohibited industries.

As drafted, the Law will no longer regulate the corporate form of FIEs, in contrast to the three existing foreign investment laws—the Wholly Foreign-Owned Enterprises Law [外资企业法], the Chinese-Foreign Equity Joint Ventures Law [中外合资经营企业法], and the Chinese-Foreign Contractual Joint Ventures Law [中外合作经营企业法]. Instead, the FIEs will be subject to the same legal regime as domestic investments, including the Company Law [公司法], the Partnership Enterprises Law [合伙企业法], and the Sole Proprietorship Enterprises Law [个人独资企业法]. Under the draft, FIEs will have three years to transform their structures after the Law’s enactment.

The Ministry of Commerce’s draft could be quite different from the one the NPCSC will consider next week, given the time that has elapsed since its release and the ongoing U.S.-China trade negotiations. Because, once enacted, the Law will repeal the three current foreign investment laws—all adopted by the NPC—we predict that it itself constitutionally also requires the NPC’s approval, likely in March 2020.

The State Council also submitted another bill with potential implications for the U.S.-China trade talks: a draft amendment to the Patent Law [专利法]. The draft was approved by the State Council on December 5. According the official summary of the State Council’s meeting, the draft “significantly raises the amount of damages and fines for willful infringement and counterfeiting of patents,” “clarifies the infringer’s burden of proof to cooperate in providing relevant materials,” provides that “network service providers shall bear joint liability for failing to timely stop infringement,” “clarifies the incentive mechanisms for inventors or designers to fairly share the proceeds from service invention-creations,” and “improves the patent licensing system.” While styled as an amendment, this draft seems to be a newer version of the draft revision to the Patent Law on which the National Intellectual Property Administration sought public comments in December 2015, given the similarity of the changes made. The draft amendment may undergo either two or three reviews by the NPCSC and is expected to pass sometime in 2019.

To help accelerate the NPCSC’s elevation of tax regulations to tax laws, the State Council submitted a draft Resource Tax Law [资源税法] to replace the Interim Resource Tax Regulations [资源税暂行条例]. It previously released a draft in late 2017 for public comments. Under the draft, resource tax is imposed on 146 kinds of natural resources (mostly minerals) in four categories: energy minerals (including crude oil, natural gas, and coal), metallic minerals, nonmetallic minerals, and salts. Codifying recent reform of the resource tax, the draft provides that, for all but six minerals, the tax is collected on an ad valorem basis (rather than based on the quantity of minerals sold, as was pre-reform). For most minerals, the draft authorizes provincial legislatures to set specific tax rates within the ranges it specifies; for others, it sets fixed rates applicable nationwide. The draft also authorizes the State Council to pilot the assessment of resource taxes on water and potentially also on forests and grasslands. Lastly, the draft specifies that where Chinese and foreign companies are now paying (around 1%) mining royalties for their cooperative exploitation of crude oil or natural gas, they will instead pay the 6% resource taxes when the Law enters into force, despite State Council regulations to the contrary. We expect the Law to pass after two reviews, likely in mid-2019.

The State Council submitted three more bills:

  • Draft amendments to the Land Management Law [土地管理法] and the Urban Real Estate Administration Law [城市房地产管理法]. As introduced in this month’s NPC Calendar, these amendments will likely codify a pilot reform that allows the transfer of the right to use collectively owned land for construction, adjusts the approval authority over house sites, and revises the standards for compensating the expropriation of collectively owned land. The NPCSC first authorized the pilot in February 2015. We expect the draft amendment to pass after either two or three rounds of deliberations.
  • Draft amendments to the Urban Residents’ Committees Organic Law [城市居民委员会组织法] and the Villagers’ Committees Organic Law [村民委员会组织法]. These two types of committees are so-called “grass-roots mass organizations of self-governance” under China’s Constitution. In theory, they are not considered part of the local governments, but in reality less so. It does not seem that this bill (styled as amendments rather revisions) will completely rewrite the Urban Residents’ Committees Organic Law, though this law was first enacted in 1989 and never amended and has been on the NPCSC’s legislative plan since 2003. (The Villagers’ Committees Organic Law was last revised in 2010). We expect the amendments to pass after either two or three reviews.
  • Likely minor amendments to the Products Quality Law [产品质量法] and 16 other (as-yet unspecified) laws to reflect this year’s government reorganization. We expect them to pass next week.

Decisions

The State Council also submitted two draft decisions. The first requests that the NPCSC extend—yet again—the land reform pilot referred to earlier, likely pending the consideration of the draft amendments to the Land Management Law and the Urban Real Estate Administration Law. We expect the NPCSC to grant this request next week.

The other seeks the NPCSC’s advance approval of some new local government debt limits. As reported by China Business Network, annual local government debt limits have traditionally been approved at the NPC’s annual sessions in March. Only thereafter can local governments start issuing bonds. If the debt limits are approved in December, then the local government bonds issued can be more evenly distributed over the next year, “thereby reducing the impact on the market,” according to a professor interviewed by CBN. We expect the NPCSC to give its approval next week.

The NPCSC will also adopt a decision to convene the 2nd Session of the 13th NPC—that is, the 2019 annual NPC session.

(And because of the presence of the character “等” in the official summary of the Council of Chairmen’s meeting, we expect the finalized agenda to include one or more legislative bills or decisions.)

Reports

The NPCSC at its upcoming session will also hear a total of 17 reports, including the State Council’s mid-term report on evaluating the implementation of the 13th Five-Year Plan for Economic and Social Development (PDF) and its report on the “special expense deductions” [专项附加扣除] for the individual income tax (enacted by this year’s amendment to the Individual Income Tax Law [个人所得税法]).

Another report we will pay close attention to is the NPCSC Legislative Affairs Commission’s report on its recording-and-review work in 2018. (We write about “recording and review” [备案审查], a fascinating aspect of the NPCSC’s work, in a series creatively named . . . Recording & Review).

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