China has publicised the Customs Audit Regulations to improve the existing legal basis for customs audits. This adds, to the existing regulations, specific clauses pertaining to third-party audits, authorised economic operators (AEOs) and voluntary disclosure practices (VDPs), among other important changes.
China has also announced a series of laws and regulations concerning cross-border e-commerce business in an effort to set up a clearer and more uniform legal framework for conducting this mode of business cross-border with China.
Moreover, China's customs authority also announced guidelines on filling in the customs declaration form for import and export goods to strengthen scrutiny and supervision over royalty payments and transfer pricing between related parties. This chapter of China Looking – Ahead will share insights on these three key topics.
Formal release of the new Customs Audit Regulations
To stay current with the changing business and global economic environments, the old version of Customs Audit Regulations enacted about 20 years ago, has been revised in State Council Decree 670 (2016).
Over the past two decades, China has become one of the most important economies in the world. The old version of the law had difficulty keeping up with the demanding requirements of business, the development of business self-governance, the challenging economic climate for global supply chains, as well as the modernisation of global customs practices. The new version of the Customs Audit Regulation has several key features, discussed below.
Formal introduction of VDPs
Voluntary disclosure practices are a prevailing customs practice in most developed countries. The intention of a VDP is to provide an opportunity for businesses to proactively identify and report non-compliance and breaches of the law to the relevant authorities before enforcement becomes necessary. A possible consequence of a VDP is that the enforcement authorities may approve lenient treatment on non-compliance and breaches of law.
According to the latest Customs Audit Regulations, China's customs authority permits VDP by businesses and may grant lenient treatment on disclosed non-compliance in the form of waiving late-payment surcharges, reducing or waiving penalties, maintaining credit ratings, or alleviating or exempting criminal charges, among others.
However, there is currently a lack of clarity on the appropriate VDP operational procedures. Operational-level customs officials understand this concept, but have not received the operational guidelines on how to handle VDPs. Businesses are recommended to continue paying close attention to the development of VDP processes. For non-compliance discovered before the issuing of more detailed procedures, business operators can initiate dialogue with the customs authority on a case-by-case basis. If necessary, they can seek support from professional firms.
Linking inspection practices to credit ratings
China customs authority categorises business operators into the following four categories according to their performance and a thorough risk management analysis, namely:
- Senior certified enterprises;
- General certified enterprises;
- General enterprises; and
- Discredited enterprises.
The new Customs Audit Regulation stipulates that credit ratings must be considered when the customs authority decides whether to inspect a given cargo and investigate certain business operators. The better the rating, the lower the inspection rate.
To qualify for a higher credit rating, business operators must have solid internal control procedures in place to ensure legal compliance, to oversee the proper operation of logistics and supply chain processes, and to monitor financial performance.
China facilitates third-party firm involvement in the customs audit process
Since 2008, the customs authority has been conducting trials directed at involving third-party intermediaries in customs audit activities. This either involves customs contracting with the third parties, or businesses themselves engaging the third parties.
During this trial period, both the customs authority and businesses have been frustrated in their efforts, from time to time, due to a lack of solid legal support for this initiative. With the introduction of a legal clause in the new version of the Customs Audit Regulation, utilising qualified third parties has become a formal legal process. According to this regulation, the third-party intermediaries will generally be auditing firms, tax firms and other qualified agencies with pertinent accounting and tax competency.
Businesses may consider taking advantage of the strength and resources of qualified professional firms in reviewing/auditing day-to-day business operations, while focusing on their core business processes.
Revised guidelines on completing the Customs Declaration Form in relation to royalties and related-party transfer pricing
Royalties and transfer pricing between related parties has been a focus of customs authorities worldwide.
The World Customs Organisation (WCO) issued customs valuation and transfer pricing guidelines in 2016.
Under the old Chinese guidelines, it was only stipulated that it is the liability of the business operator to declare related prices accurately and correctly. However, there was no concrete tool or operational mechanism for the business operators to assume this liability.
New guidelines are now in effect as the Guidelines on Filling in the Customs Declaration Form for Import and Export Goods in GAC Circular 20 (2016). With the new Chinese guidelines going into effect, business operators are required to declare and make a statement at the time of goods entering China regarding:
- Whether there is any royalty payment, and if so, whether the royalty is dutiable; and
- Whether there is related party relationship, and if so, whether the relationship affects the import price declared, etc.
This may have an impact on business operators that have related-party transaction arrangements. For operators who are planning to have related-party transactions, it is necessary to establish sound pricing practices that consider the implications from both the perspective of the customs and the tax authorities. For operators, which are operating under a related-party structure, it can prove helpful to conduct a self-assessment, make pricing practice improvements where necessary and document supporting material for future use.
With regard to identifying non-compliance or uncertain areas, it is useful to raise issues with the customs authority for clarification, confirmation, or remedial action. Failure to do so, if later detected by the authorities, could set the ground for heightened future customs investigations, late-payment surcharges and customs penalties.
According to China's Regulations on Import and Export Duties, where the customs authority discovers upon customs clearance that there has been a short payment of customs duty and taxes, customs will collect the amount due from the taxpayer within one year from the date of payment of customs duties, or customs clearance. Where such short payment was caused by a breach by the taxpayer, the customs authority may recover the customs duties for up to three years from the date of payment of customs duties, or customs clearance. Based on typical practice, the customs authority tends to collect three-year overdue tax on issues concerning customs valuation, especially for royalties.
Improving the legislative framework for cross-border e-commerce
China has 10 pilot cities for cross-border e-commerce, including Shanghai, Hangzhou, Ningbo, Zhengzhou, Chongqing, Guangzhou, Shenzhen, Tianjin, Fuzhou and Pingtan.
In order to further regulate this kind of business, the Chinese government announced a series of new policies for cross-border e-commerce and a list of cross-border e-commerce retail imports in 2016. This is making the related legislation landscape more concrete and uniform.
Before these laws and regulations became effective, the pilot cities had been operating e-commerce import arrangements on a trial basis in a manner that lacked enough transparency and which exhibited excessive diversity. The system of laws was not mature enough to secure revenue or foster fair competition between different types of business models (e.g. direct B2C e-commerce and traditional import models).
A new system is now provided in the Circular, of the Ministry of Finance, General Administration of Customs and State Administration of Taxation, on the tax policy for cross-border e-commerce retail imports, issued as Caiguanshui 18 (2016), and in the Announcement on the regulation of cross-border e-commerce retail imported and exported goods, issued as GAC Circular 26 (2016).
Firstly, the new system sets out the tax and customs clearance treatment for cross-border e-commerce supplies, as well as for import of normal postal and personal items. The new system clarifies the customs operational procedure for direct shipments and bonded shipments. Most importantly, the new system strengthens scrutiny on the import of foodstuffs, cosmetics, infant formula and dairy products, etc. However, according to customs information, the authorities have left some buffer time, until May 11 2017, before the cross-border e-commerce sector may start to be subject to the new commodity inspection and quarantine formalities under the new e-commerce regulatory framework, which are equivalent to the procedures applied to formal entry (general trade type) shipments.
Previously, cross-border e-commerce platforms cleared customs according to tax regulations on personal postal articles and purchases. This made the imported e-commerce items eligible for a duty-free allowance, where the duty that would otherwise arise fell below the threshold of RMB 50 ($7). Under the new rules, e-commerce imports are subject to an integrated tax rate. Whether the overall tax burden is higher or lower for e-shoppers under the new regulations, relative to the postal tax, depends on the types of goods.
For example, a parcel of foodstuff priced at RMB 200 imported through a cross-border e-commerce channel was, under the old rules, subject to a 10% personal postal articles tax (RMB 200 × 10% = RMB 20) before April 8 2016, but the duty payable was waived by customs because it amounted to less than RMB 50, the taxation threshold. A consumer paid only RMB 200 for this item. Under the new system, the same item needs to pay a customs tariff (temporarily set at 0%), VAT (RMB 200 × 17% × 70% = RMB 23.8) and consumption tax (no consumption tax for food = 0%). The consumer ultimately has to pay RMB 223.8. This example reveals that the consumer ultimately pays a higher price for the same item under the new tax policy.
E-commerce may have some advantages compared to traditional business models, but this does not necessarily mean that every business should switch from their traditional channels to cross-border e-commerce channels. Businesses should take into account product types, business strategies, end-to-end tax implications and operational efficiency to identify an appropriate model for their operations.
8th Floor, Tower E2, Oriental Plaza
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 customs advisory/defence services such as HS (Harmonised System) codes 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, customs valuations, and VAT and transfer pricing, which are closely linked to customs issues.
Eric is a chartered tax adviser (CTA) from the Chartered Institute of Taxation in the UK and is a member of the Association of Chartered Certified Accountants (ACCA).
8th Floor, Tower E2, Oriental Plaza
Helen Han worked for China Customs more than 10 years in various departments such as the Investigation Bureau and Post-Clearance-Audit Section in both 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 in the Customs authority and a trainer for nationwide Customs officials. She was sent by GAC to study post-clearance audit, price valuation, risk management and customs management abroad, and also attended a few international customs academic seminars to discuss with World Customs Organisation experts on behalf of 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 enterprises in various industries. She has also been a guest speaker at various customs seminars and training courses hosted by Customs authority.
Helen has a master's degree in economics.
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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.
Senior Manager, Tax
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Philip has worked for the China Customs at both GAC and Huangpu Customs District for more than eight years. After that, he joined KPMG China in 2007.
In KPMG, he has been actively involved in a wide range of customs projects such as customs valuation, compliance review and internal control improvement. He has advised multinational clients on various customs cost-saving opportunities, such as duty-free equipment and processing trade practice. He has also assisted his clients in audit defence and customs operation setup issues.
His clients include manufacturing, logistics and trading companies. Industries involved include electronics, chemicals, machinery, aeroplane repairing, luxury consumables and foods.
Philip holds a bachelor of economics degree, with a major in finance, from Wuhan University.
Senior manager, Tax
38th Floor, Teem Tower
Melsson has more than 20 years of professional experience of working in China Customs, commercial business and consulting. He advises multinational clients on handling logistics related projects, as well as taking care of consulting related to customs audit and investigation, processing trade management and tariff engineering.
Melsson started his career as an officer with China Customs, after graduating from a top customs school, then he moved to the private field, and was responsible for customs and logistics operations of a well-known telecommunications manufacturer. He also served at leading logistics and supply chain management companies as the regional customs & solution manager for southern China. Melsson is a member of the expert panel for the Guangzhou government and a licensed customs broker.
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