China and Chile sign DTA
On May 24, Premier Li Keqiang and a delegation of Chinese senior officials arrived in Chile. During the visit, China and Chile signed a double taxation avoidance agreement (DTA), updated their Free Trade Agreement and agreed on setting up an RMB clearing center in Chile, reports China Briefing.
China and Chile have developed a strong diplomatic relationship over the years. Chile was the first South American country to establish diplomatic ties with China, in 1970. It is also the first Latin American country to have signed a Free Trade Agreement with China, the other two being Peru and Costa Rica. This new DTA is therefore further evidence of the two’s strong bilateral ties, and will be a boon to companies from both countries.
There was a symbolic side to China’s DTA with Chile, this being the 100th tax treaty China has signed with a foreign country. The agreement is in line with the latest international tax developments, since it deals with the topic of base erosion and profit shifting (BEPS) – one of the main issues discussed at the most recent G20 meeting. Thus, as China’s State Administration of Taxation (SAT) delegation pointed out, the DTA will balance the countries’ fiscal regulation in order to encourage Sino-Chilean foreign investments.
In addition, the People’s Bank of China (China’s central bank) announced on July 9 that the Chilean branch of China Construction Bank will be designated as offshore RMB clearing bank. This makes Chile the first Latin American country to have an RMB clearing center. In addition, a quota of RMB 50 million will be allocated to Chile in RMB Qualified Foreign Institutional Investor quotas (RQFII). The RQFII program allows stocks in China’s onshore markets to be purchased with offshore RMB. Furthermore, People’s Bank of China announced a three-year RMB 22 billion currency swap deal between the two countries.
To move the strong relationship between the two countries forward, a Memorandum of Understanding to upgrade the 2005 China-Chile Free Trade Agreement (FTA) has been signed. The amendment will mainly increase the number of goods covered, and provide new tax incentives. A joint working team is scheduled to start studying the terms and conditions of the upgraded FTA in August.
Economic considerations have been a main driver in the relationship between the two countries. While Chile’s GDP of US$277.2 billion only amounts to 3 percent of China’s (US$9.240 trillion), Chile alone supplies 30 percent of China’s copper imports, an essential commodity in China’s construction boom over the past years. Now that China is planning to expand its focus on infrastructure development with the One Road One Belt initiative, the Middle Kingdom’s demand for Chilean copper is unlikely to dry up anytime soon. China’s imports of mining products from Chile, mainly copper and lithium, have driven the 26 per cent increase in Chile’s exports over the last decade.
In other areas, trade between China and Chile has flourished as well, reaching US$34.1 billion in 2014 alone. Some of the most promising industries identified by observers are logging and fishery, as well as the renewable energy, infrastructure and automotive sectors, which are expected to grow by over 30 percent. Also, Chile is now China’s leading provider of bulk wine and its third largest source of bottled wine. Other major agricultural exports – including blueberries, cherries and apples – have been steadily increasing as well.
In many of these industries, Chile is competing for Chinese market share with Australia. Australia signed its Free Trade Agreement with China in late 2014, as did New Zealand in 2008 – another major trade competitor of Chile. At the same time, Chile is looking to maintain its lead in South America. Chinese investment and trade with the continent is rapidly picking up, with Chile, Brazil and neighbouring Peru already having China as their biggest trade partner. Peru, too, has an FTA with China, signed in 2009.
“Chile has undeniably been on the forefront of South American economies facing China and took the lead in developing commercial ties”, states Riccardo Benussi, International Business Advisory Associate at Dezan Shira & Associates’ Shanghai office. “Chilean entrepreneurs and trade agencies have planted strong seeds deep in the arena of international trade with China and through the resilience of predominant sectors such as their refined copper, ore, wood pulp and acclaimed wines and salmon, trade figures are definitely looking bright, as more Chilean investors are setting up their operations in China, to beef up the already impressive exports to China that count for 23 per cent of its global exports.”