Trade Compliance Healthcheck and Self-disclosure
By Deming Zhao
a recent report by customs and trade compliance practice of Global Law Office,
out of the reported administrative investigations by ASB of Shanghai Customs in
2018, 39% cases were triggered by HS code inaccuracy that resulted in
imposition of administrative penalties. This illustrates how easy the importer
or exporter of record may incur liabilities for using wrong HS codes in
Significance of Trade Compliance
the integrated clearance reform, customs clearance efficiency is greatly increased.
However, trade facilitation is based upon trade compliance on the part of all
importers or exporters of record. On one hand, the company with good compliance
records may be rewarded with an AEO status to enjoy more trade facilitation
benefits; on the other hand, illegitimate declaration and customs clearance
practices can be easily identified through monitoring systems of the Tax
Collection Centers and Risk Control Centers, and through more vigorous
post-clearance customs queries, audits and investigations.
the event of non-compliance with China customs law for import transactions, the
importer of record for instance will be exposed to 30%-200% of short payment of
import duties, VAT, and consumption tax (if any). If illegitimate declarations
are intentional, the importer of record will be exposed to the administrative
or even criminal smuggling liabilities. Those individual employees of the
importer will be indicted with the crime of corporate smuggling if they
directed or simply knew the incorrect declarations to China customs before or
at the time of the declarations. For export transactions, non-compliance with
China customs law by declaring incorrect HS code may result in over-claiming
export VAT rebate benefits, or evading the export control regulations, and
there may ensue a customs penalty or even the crime of export VAT rebate fraud
or the crime of smuggling when the exporter of record knew or must have known
that the declared HS code was not correct.
serious cases, China customs may discredit the importer of record who will lose
the trade facilitation treatment.
any non-compliance case, if the short payment of customs duties and VAT amounts
to several thousands of RMB, Anti-smuggling Bureau (“ASB”) will investigate
into the case.
Trade Compliance through Healthcheck
audits by the customs authorities will trace three years of past import and
export clearances. ASB will investigate and penalize illegal declarations that
occurred within the prior two years. However, if illegal declarations are of a
continuous nature or they are intentional mis-declarations, ASB of China
customs will not confine its investigation to two year clearances
manufacturing multinational companies’ perspectives, it is by no means an easy
task to ensure trade compliance. Given the technical nature of items to be
declared, such as tariff classification, customs valuation and country of
origin, understandably there are often errors or mistakes in declaring such items
relevant to thousands or even millions of part numbers. The risks of
non-compliance would be out of control if there were no regular healthchecks or
internal compliance audits on such trade declarations.
the importer or exporter of record at least must ensure (a) if it has any
non-compliance incidences in the recent two years and (b) such incidences can
cease and be rectified as promptly as possible. The healthcheck or legal audit
of import and export practices will help to ensure such trade compliance.
code is one of the key areas for trade compliance healthcheck as legal risks
often arise from issues relating to mis-classification of import or export
goods. In a recent report by customs and trade compliance practice of Global
Law Office, out of the reported administrative investigations by ASB of
Shanghai Customs in 2018, 39% cases were triggered by HS code inaccuracy that
resulted in imposition of administrative penalties. This illustrates how easy
the importer or exporter of record may incur liabilities for using wrong HS
codes in China.
an HS code used for a given import product, for instance, the importer of
record must review the “declaration elements” China customs has assigned to
that code, to see whether declaration elements that function in the
classification rules of China nomenclature are consistent with the product
itself. Assuming consistent, the importer of record has to reasonably exclude
applicability of other HS codes to the same product. This is difficult as this
is a matter of application of technical and complex classification rules to
different products. In other words, this is a difficult and technical legal
issue and preferably must be controlled by customs lawyers.
now uses 13-digit HS codes. Although the first 6-digit headings and
sub-headings are universal in theory, China customs may identify headings or
sub-headings different from a customs authority in another country. 7-8 digits
as China subheading are subject to China subheading notes. 9-10 digits imply
customs supervision mode (e.g. whether a license is required) and 11-13 digits
reflects the supervision modes by AQSIQ which is now part of China Customs as a
the possible different practices in China, it should be considered to review
all import HS codes used in the past no matter whether the first 6 digits are
consistent with export HS codes of the exporting country.
case the company finds it difficult to determine a given HS code as a matter of
law, the importer or exporter now may apply for a pre-ruling on HS code to
China customs. The pre-ruling application shall be made when the existing
classification rule is truly unclear. This is a new method promoted by the
customs in 2018. The pre-ruling application shall be made when the existing
classification rules and decisions are truly silent on the HS code of the same
product. Careful assessment and communication with the customs authorities must
be made before official application is submitted. In this connection, we helped
a multinational client and obtained the first pre-ruling from Shanghai Customs.
on HS codes may avail the company to apply for the customs precedent HS code
database status to be certified by China Customs. We are now helping a
multinational client in reviewing HS code database with China Customs in a
pilot program of customs precedent HS code database certification.
Dutiable Value and Transfer Pricing
valuation is the second reason for ASB investigation cases according to GLO
reports on Shanghai Customs investigation cases.
Dutiable value elements
customs will determine the dutiable value of import goods roughly on the basis
of CIF value. If the import price does not include CIF elements, the importer
of record must ensure the declared dutiable value has cost, freight and
insurance ingredients. Failure to declare freight for FOB import transaction
for instance will result in short payment of import duties which will be
exposed to customs audit or ASB investigation.
Undue transfer pricing fluctuations
most imports are subject to inter-company transactions, the import price will
be viewed by China tax and customs as transfer pricing. Due to system or human
errors, the import or export price as declared sometimes does not reflect the
true value of transfer pricing policy and would affect import duties or export
VAT refund amount. Very likely the ASB will view such errors as untruthful
declaration of import and export values and impose a customs penalty. Companies
must carefully address such error cases in the process of healthcheck and
sometimes legal defenses can be developed to avoid customs
import transfer price, China customs may raise queries against the import
transfer price at any time when customs authorities have reason to believe the
import transfer price is affected by the inter-company relation between the
importer and exporter of record. Such reason can be abrupt increase or decrease
in the import price, or unreasonable stability of import price for two years or
the company cannot justify the adequacy of its price with customs valuation
methods, customs will re-value import goods and thus increase the import
dutiable value and levy more import taxes.
healthcheck will determine whether the import transfer pricing set by tax rules
may also justify itself under custom valuation rules. Sometimes this involves
design of business models to avoid or reduce customs valuation risks.
for licensing intellectual property to a subsidiary in China by a multinational
company are often not included in import transfer price and thus China customs will
levy import duties on such royalties if relating to import goods even though
the licensee paid tax to tax bureau already. It is a complex issue and process
for customs to determine the connection of import goods to royalties and if so
how to apportion the amount of royalties to the dutiable value of the such
import goods. Normally there is room for multinational companies to avoid or
reduce such customs duty risks.
healthcheck will assess the dutiability risks of such royalties and determine
whether legal defenses are available and whether the licensing model can be
the healthcheck, if any non-compliance is identified, the importer or exporter
of record must cease such non-compliance immediately. For future declarations,
the trader must make correct declarations or use reasonable customs values as
suggested by the professionals conducting the healthcheck.
problems occurred in the past, the company may consider self-disclosure scheme
to resolve all past issues.
policy is promoted by China Customs since 2016 to encourage self-exposure of
non-compliance declarations by traders. If the self-exposure nature is accepted
by a given customs, non-compliance will be subject to a penalty less than the
statutory range. If the non-compliance is of a minor nature, corrected in a
timely manner and has no harmful consequence, the customs would impose no
administrative punishment. When the company makes up for the short-paid tariff,
the customs may reduce or exempt late surcharge.
note, however, if it is a crime of smuggling, self-disclosure would not
eliminate the criminal consequences, though the criminal penalty may be reduced
as a result of self-disclosure. Therefore, thorough legal review of the whole
case is crucial before the self-disclosure is submitted to the customs.
the vigorous post-clearance audits and investigations by China customs, the
importer or exporter of record must have a regular trade compliance healthcheck
in place to identify and eliminate illegal declarations or customs clearances
in a prompt way. This will effectively prevent legal liability risks from
accumulating, and resolve the issue before it escalates to a crisis.
Self-disclosure is one of the ways to resolve the non-compliance issues. For
both healthcheck and self-disclosure, legal advisors can accurately identify
the non-compliance and risks and at the same time possibly develop defenses to
protect the interest of both the company and its management.
Du Yiqi, associate of Global Law Office, also makes contribution to this