Grain Tax Break Covers Soybean Reserve Sales

A decree by China's State Council expanded a tax waiver for state-owned grain marketing enterprises to include sales of soybeans held in government reserves beginning in May 2014.

Chinese authorities use the 13-percent value added tax (VAT) to encourage or discourage various behavior and to create price wedges between domestic and international commodity prices. The VAT is a 13-percent tax (for ag commodities) on the difference between the purchase value and the sale value, but there are all kinds of exemptions and rebates. Exported commodities get a rebate on VAT, except when authorities want to discourage exports. Commodities sold by farmers and farmer cooperatives are exempt from VAT. The VAT raises the cost of imported commodities by 13 percent since the VAT is assessed on the gross value of imported shipments, including tariff, when they reach China.

The new tax waiver for soybeans extends coverage of a 1999 Tax Bureau decree (财税字[1999]198号) that waived VAT on sales of grain and edible oils from government reserves conducted by state-owned enterprises responsible for managing reserves. The waiver also applied to grain used by the military, grain for disaster recovery, and to grain supplied to people displaced by reservoir construction projects. The waiver does not apply to processing of grains.

The 1999 waiver did not explicitly include soybeans. The May 2014 decree expands the waiver to cover soybeans sold from state reserves.

The main beneficiary of the waiver is Sinograin, the state-owned company in charge of managing government reserves. A Sinograin employee told a China Grain and Oils News reporter that the waiver would simplify tax accounting procedures because currently some localities collect the VAT on reserve soybeans, others don't, and still others have varying policies on the VAT.

The significance of the waiver is related to the "shun price" (顺价) principle, which roughly-translated means costs must be passed on when grain is sold from reserves:

sale price ≥ purchase price + [interest + tax + reasonable profit + labor expense].

In other words, grain can't be sold at a loss. When grain is offered at auction, the minimum price is set to cover these costs. When market prices are below the purchase price, none of the grain can be sold and it stays locked up in reserves. Exempting the seller from the tax reduces the threshold price slightly, making it easier to sell the reserve grain.

This year much of China's corn and soybeans were purchased at "temporary reserve" prices that exceed market prices. Now that the November-April procurement period has ended, authorities (and Sinograin and the Agricultural Development Bank of China which finances the reserves) are eager to dump their reserves back into the market and make them more price-competitive versus imported commodities.