In 2017 China made notable progress with the nationwide rollout of its modernised national customs clearance integration regime. This further steered the focus of customs administration work processes, away from the ad hoc inspection of goods before their release, towards a more automated system in which enforcement relies on post-clearance review and audit.
The customs authorities, following internal reorganisation, are now in a better position to conduct more frequent and targeted customs audits. To assist with this, customs auditors now have more data analytical tools at their disposal to better monitor the accuracy of the enterprise declarations. As such, enterprises importing/exporting goods into/from China need to enhance their internal controls over the import/export process, minimise manual handling errors, and ensure that customs declarations are accurate.
The new national customs clearance integration regime
Following a series of pilot programmes in selected cities in 2016, a new customs clearance integration regime was rolled out to the whole country from July 2017. This seeks to standardise customs enforcement and improve customs clearance efficiency nationwide. Two key elements, the 'two centres' and the 'three systems', underpin the new regime.
The term 'two centres' refers, in fact, to two types of centres:
- The National Customs Risk Prevention and Control Centres (RPCCs) are established in Shanghai, Huangpu, and Qingdao. The RPCCs provide high-level oversight and management of customs risk prevention and control activities, which are carried out at customs clearance points across China. These look to ensure the safe entry of goods imported by air, land and sea. The RPCCs are responsible for setting safe entry parameters for paperless clearance for import and export licences, certificates of origin, China compulsory certifications (CCCs), China inspection and quarantine (CIQ) certificates, as well as setting tax collection and administration standards.
- The three Tax Collection and Administration Centres (TCACs) are established in Beijing/Tianjin, Shanghai and Guangzhou. These verify the accuracy of tax filings for goods imported through all Chinese ports, examining the use of appropriate harmonised system (HS) code classifications (i.e. codes attributed to specific products), valuations, and country of origin declarations.
The 'three systems' refer to three fields into which customs clearance work is segmented, between the RPCCs, TCACs, and frontline customs offices. These three customs clearance regime systems are 'one declaration with review in stages', 'reform of tax collection and administration procedures', and 'cooperative supervision':
- 'One declaration with review in stages' separates the safe entry supervision and tax collection supervision process steps. At step 1, the RPCCs will analyse and verify the safe entry criteria for imported goods, such as product name, quantity, weight, and whether the goods are restricted/prohibited for import. Once the entry risk review is cleared, the goods are released upon the payment of import taxes or the corresponding deposit. At step 2, the TCACs will analyse and verify tax relevant matters such as tariff classification, valuation, and country of origin of the commodities.
- 'Reform of tax collection and administration procedures' reinforces requirements on enterprises to make truthful declarations and pay import taxes in full. The review of tax-relevant matters will no longer just take place at the customs clearance stage, but will be conducted throughout the whole import supervision process. The verification of customs declarations will no longer be conducted on each shipment at the time of customs clearance, but on selected shipments chosen by random check.
- 'Cooperative supervision' institutes a clearer 'division of labour' between the various entities within the Chinese customs administration. Port customs will mainly supervise transportation, importation of goods and personal articles, as well as customs special supervision areas. In-charge customs (i.e. the customs authority with which an importer/exporter registers) will mainly manage the customs audit, customs enterprise credit management and other post-importation supervision and compliance management. The customs audit team, the anti-smuggling team and the customs clearance supervision team (i.e. RPCCs and TCACs) will each play their specialised roles in coordination with port customs and the in-charge customs authorities.
With the 'three systems' in place, the customs administration of import/export declarations will follow three steps:
- Step 1 – Inspection before release of goods: the RPCCs will analyse whether imported goods carry safe entry risks, are restricted/forbidden items, give rise to patent and trademark infringement, or involve untruthful declarations of commodity name or description, specification and quantity. Instructions will be given by the RPCCs to on-site customs personnel to inspect specific batches of imported goods. The TCACs will conduct risk analysis of tax-related matters before the release of imported goods, and instruct on-site customs personnel to carry out on-site goods verification and examination in case of significant tax collection risk.
- Step 2 – Risk screening after release of goods: the TCACs will conduct post-importation batch review on tax-related matters in customs declaration forms, screen and select high-risk importations, and carry out verification work. The TCACs will reach out to the companies or instruct in-charge customs authorities to conduct audits, after the release of goods.
- Step 3 – Regular or special audit performed by in-charge customs: the in-charge customs authority will be mainly responsible for performing post-import supervision through regular or special audits.
With the rollout of the customs clearance integration regime nationwide, the majority of imported goods will be released after the importer declaration passes the automated system review (i.e. after the computer system checks that all the relevant information has been included on the electronically filed customs declaration form). It is estimated that manual review of customs declaration documents will fall to less than 10% of imports. The TCACs will perform batch review on tax-related matters in approximately 20% of the importer self-declarations after the release of goods. Enterprises will benefit as follows:
- Declaration at a location different from the importation port: enterprises are now enabled to choose a suitable port and clearance mode for customs declarations. For example, an enterprise could import goods at port A while it declares with the local customs authority located at port B. Before the reform, imports and customs declarations needed to be conducted at the same port of entry, or at the in-charge customs authority upon approval from the port of entry.
- Consistent law enforcement by customs: different regional customs authorities used to have different interpretations of customs policies and regulations. This resulted in the same imported goods being subject to different taxation treatment at different ports. Under the new regime, the three TCACs are expected to conduct uniform high-level inspection and risk review of importations nationwide to minimise the inconsistency of regulation enforcement by local customs. Enterprises can establish unified operating process standards, and centralise customs clearance procedures to reduce expenditure of time and operating costs. They can consequently shift more focus to customs risk control and internal process improvement.
- Improvement of customs clearance efficiency: according to the statistics from customs, average customs clearance time has been reduced by one third since July 1 2017. It is expected that the clearance time will continue to reduce. It can be foreseen that after the implementation of the national customs clearance integration system, customs will devote greater resources to post-import supervision. Enterprises are consequently expected to encounter more customs inspection and audit and are recommended to optimise internal processes, and utilise periodic self-inspections and voluntary disclosure mechanisms.
Impact of the latest China customs regime developments
The new Customs Audit Regulations released in July 2016 announced that the focus of customs audit work would be shifted from 'inspection before release of goods' to 'supervision and review after post-clearance'. This is supported by the new national customs clearance integration regime. Enterprises should expect to encounter heightened customs audit activity:
- More customs audits: with the establishment of the three TCACs, customs audits focusing on specific categories of goods are likely to be centrally arranged by the TCACs as coordinated nationwide programmes. For example, an enterprise that imports certain types of luxury products (e.g. high-end shoes and bags) in Shanghai, and which maintains import records with the Shanghai customs authority, may find themselves audited by the Beijing TCAC, as responsibility for the corresponding HS codes may be allocated to the Beijing TCAC for review.
- New customs audit issues: customs audits in China are currently focused more on traditional tax-related issues, such as HS code classification, valuation of imported goods, royalty payment, related party transactions, and so on. It is expected that with more and more post-clearance review efforts, more audit issues will be added to audit scopes. For example, with the conclusion of more free trade agreements (FTAs), and more experience gathered from audits performed by customs in FTA contracting countries, China customs may start reviewing the trade benefits claimed by the importers in China. In this regard they may question whether or not the importers have reported an incorrect country of origin to enjoy the FTA preferential duty rates.
- Greater use of automated tools in customs audits and involvement of third-party intermediaries: customs audits are not limited to the review and verification of clearance-related paper documents, but extend to audit of the accuracy and completeness of electronic customs data. To enhance data verification capabilities, customs officials have been working with trade solution providers on data analytic solutions for more effective audits. The Customs Audit Regulations entitle customs authorities to engage out-sourced third-party intermediaries in customs audit activities. Qualified third party intermediaries include accounting firms, tax firms, and other qualified agencies with pertinent accounting, tax and customs competency in customs audit processes.
Automated solution systems strengthen internal control and compliance management
Under the new Chinese customs clearance administrative environment, enterprises take on greater responsibilities. While this brings challenges it also presents a unique opportunity for enterprises to enhance their competitiveness. It is noted that compliance status directly impacts enterprise 'credit ratings' and corresponding customs treatment. In our experience enterprises can usefully enhance their internal controls in the following manner:
- Identify control points and responsible employees throughout the import/export business process;
- Set up checklists for each control point and working protocols to standardise the detailed procedures;
- Ensure data accuracy at first input, or use an automated solution to generate customs declaration documents, and perform reasonableness checks before declarations are submitted to the customs authority;
- Establish risk communication mechanisms to enable self-review and self-reporting. This should help to avoid, identify and correct errors at each step of the process;
- Conduct regular health checks on customs compliance and put reporting system in place to check the enterprises' overall compliance practice; and
- Where non-compliance is identified, use voluntary disclosure mechanisms, as encouraged by customs authorities, to access potential lenient treatment.
Enterprises may benefit from cooperation with third-party intermediaries, and can draw on their resources and capabilities to achieve the above objectives. Such intermediaries can act as an effective bridge, helping enterprises interface optimally with the demanding Chinese customs environment. In addition, customs risk management can be enhanced through an automated system solution, which minimises the potential for manual errors from daily customs handling. Leading global trade solution suppliers, and experienced tax and trade consulting firms have developed trade solutions and data analytic tools. These can assist enterprises to standardise working procedures, pinpoint import data errors, anomalies, and unmet payment obligations for China import taxes, as well as help with identifying potential savings.
The authors would like to thank Lina Hu for her contribution to this chapter.
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Eric Zhou worked for China customs for more than nine years before joining KPMG China in 2004, where he is now the national leader of the trade and customs practice.
Eric specialises in cross-border trade and customs advisory/defence services such as harmonised system (HS) code determination, customs valuation and processing trade management concerning multinational enterprises in industrial markets and consumer markets. He also has extensive experience of corporate income tax, indirect tax and transfer pricing, the latter of which are closely linked to customs valuation.
Eric is a Chartered Tax Adviser (CTA) of the Chartered Institute of Taxation in China and is a member of the Association of Chartered Certified Accountants (ACCA).
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Rachel Tao has been actively involved in a wide range of customs projects, assisting clients in advisory and defence cases in connection with import and export operations from a trade compliance perspective.
Rachel is specialised in various trade and customs aspects, including customs valuation and tariff classification, utilisation of special trade programmes and trade zones and assisting companies with reviewing, auditing and assessing import and export operations. In particular, Rachel has worked for many clients facing various enquiries and investigations of the authorities as regards their import and export practices, and helping them to achieve favourable outcomes.
Rachel has served clients in various industries. Her major clients include importers and manufacturers of consumer, electronics, pharmaceutical and automotive products.
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Before joining KPMG in January 2004, Dong Cheng served as the director of policy research in the Shanghai Customs from September 1991 to December 2003. During his tenure, his role was to research complex customs issues from the various local customs units in the Shanghai region and advise them on the appropriate treatment. In addition, he was involved in the drafting of a number of China customs regulations. Over the years, Dong Cheng has developed excellent relationships with senior customs officials throughout China.
Since joining KPMG, Dong Cheng has been integrally involved in the analysis and development of resolution strategies for multiple trade and customs issues, including customs valuation, import tariff classification and related-party pricing.
Dong Cheng gained extensive knowledge and experience in all major areas of customs duty activities, such as valuation, duty reduction and exemption, duty collection methodology and customs policy implementation study, through providing services to many multinational corporations in various industries, including automobile, chemical and luxury goods. These services comprise strategic planning, duty saving and industry-specific analysis. He has also assisted many multinational companies to cooperate with customs audits on various issues, such as smuggling and the false declaration of import goods.
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Helen Han worked for the China customs for more than 10 years in various departments, such as the investigation bureau and post-clearance-audit section in both the General Administration of Customs (GAC), Guangdong sub-administration and Huangpu customs. She also worked for local government and has overseas study experience, having pursued a master's degree in art in Paris before joining KPMG in China.
Helen worked as a project leader at the customs authority and a trainer for nationwide customs officials. She was sent by the GAC to study post-clearance audit, price valuation, risk management and customs management abroad and also attended a few international customs academic seminars for discussions with World Customs Organisation experts on behalf of the China customs. She was involved in writing and designing regulations and used to organise and was responsible for some important cases.
Since joining KPMG, Helen has been integrally involved in a wide range of customs projects such as consulting, compliance and defence, including customs valuation, processing trade, internal control implementation and related-party pricing. She provides services to many multinational corporations in various industries. She has also been a guest speaker at various customs seminars and training courses hosted by the customs authority.
Helen has a master's degree in economics.
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