TRADE IN GOODS

Opportunities for Hong Kong Producers
CEPA offers a reduction to zero tariff on qualifying products covering items from a wide range of industries and therefore benefits qualified producers with a competitive edge as a result of significant costs savings. In the long run, zero tariff access under CEPA can benefit exports of Hong Kong origin products to the Mainland and promotion of Hong Kong brand names.

How to Qualify
To be eligible for zero-tariff treatment under CEPA, a local producer producing qualifying products in Hong Kong must:

Under the stipulated rules of origin, a product is deemed Hong Kong origin product if it is wholly obtained or undergone substantial transformation in Hong Kong. In determining whether there is substantial transformation in Hong Kong, the following five criteria will be taken into account.

a.	Manufacturing or processing operations refers to the principal manufacturing or processing operations carried out in Hong Kong which confers essential characteristics to the product derived after the operations.
b.	Change in tariff heading refers to the processing and manufacturing operations of non-originating materials carried out in Hong Kong and resulting in a product of a different four-digit heading under the Product Description and Harmonised Systems Codes?.
c.	Value-added content refers to the total value of raw materials, component parts, labour costs and product development costs exclusively incurred in Hong Kong being greater than or equal to 30% of the FOB value of the exporting goods, and the final manufacturing or processing operations should be completed in Hong Kong . (This 30% value-adding requirement has been relaxed for watches of Hong Kong under the Phase III of CEPA.)
d.	Other criteria refer to methods other than those set out above.
e.	Mixed criteria refer to the use of two or more of the above criteria.

Simple diluting, mixing, packaging, bottling, drying, assembling, sorting or decorating as well as adoption of any production or pricing practice with the purpose of circumventing provision as mentioned in CEPA documentation will not be regarded as substantial transformation.

TRADE IN SERVICES

Opportunities for Hong Kong Suppliers
CEPA lowers the threshold requirements for market entry and early opens up certain service sectors on the Mainland for qualified services suppliers in Hong Kong. Qualified service suppliers can therefore enjoy first mover advantage over their foreign counterparts in exploring and penetrating the Mainland market through the following ways:

a.	early liberalisation measures which allow Hong Kong service suppliers to take advantage of China?s WTO commitments ahead of other foreign counterparts;
b.	market access conditions above and beyond China's current WTO commitment which allows Hong Kong service suppliers to establish wholly-owned operations on the Mainland ahead of other counterparts;
c.	lower thresholds of entry which offer an effective market access to the Mainland service sectors; and
d.	mutual recognition of qualifications and relaxation of regulations on Hong Kong service suppliers.

How to Qualify
To be entitled to the CEPA treatment, a service supplier, in general, must:

a.	be incorporated or established under the laws of Hong Kong and obtain a valid business registration certificate.
b.	engage in substantive business operations in Hong Kong for 3 years or more. The nature and scope of the services it provides in Hong Kong should encompass the nature and scope of the services it intends to provide in the Mainland.
c.	be liable to pay Hong Kong profits tax during the period of substantive business operations.
d.	own or lease premises in Hong Kong to engage in substantive business operations. The scale of its business premises should be commensurate with the scope and the scale of its business.
e.	employ in Hong Kong 50% or more of its total staff.
f.	satisfy other specific criteria for respective service sectors.

A Hong Kong service supplier must apply to the TID for Certificate of Hong Kong Service Supplier (HKSS) before they can apply to the relevant Mainland authorities to be eligible for relevant service provisions on the Mainland. A certificate of HKSS is valid for 2 years and can be renewed bi-annually.

HOW TO BENEFIT A FOREIGN COMPANY
Foreign companies interested in developing their business in China will find Hong Kong as the most advantageous business platform in the region to support their business strategies. Under CEPA, foreign companies investing in Hong Kong companies and satisfying the qualifying criteria can enjoy CEPA provisions to enhance their access to the Mainland market . It appears that CEPA provides foreign companies making use of Hong Kong's first mover advantage a head start over their counterparts in exploring the Mainland market.

(If more than 50% shareholding interest of a CEPA qualified Hong Kong service supplier is acquired by a foreign company through a merger or an acquisition on or after 29 June 2003, the service supplier being merged or acquired can reapply for Certificate of HKSS one year after the merger or acquisition, given that requirements for qualified Hong Kong service supplier are met at the time of re-application.)

APPENDIX I :Summary of Products Enjoying Zero Tariff under CEPA I, II & III

APPENDIX II : Summary of Service Sectors Opened Up for Hong Kong Service Suppliers under CEPA I, II & III