Trade Compliance and China Customs Audit
By Deming Zhao
Under China Customs Automated Clearance Reform, trade compliance is the key to sustain customs clearance efficiency. As one of the post-clearance customs supervision measures China customs audit aims at identifying non-compliances, if any, from business operations in China, and the business operations in China of multinational companies will be exposed to the legal consequences if customs auditors identify instances of non-compliance with China customs laws and regulations.
I. What is the scope of China customs audit?
Anytime within 3 years after imported or exported goods are released, China Customs is entitled to audit these goods as well as all related import and export documents and accounting books and records. By way of audit China Customs intends to detect non-compliances and transfer such non-compliances to Anti-smuggling Bureau (ASB) for further administrative or criminal investigation. Companies with the import, export or conduct bonded logistics or inward processing business in China is supposed to be prepared for potential customs audit.
According to the PRC Customs Audit Regulations, the scope of customs audit is to examine the “truthfulness and legality” of import and export activities. If the import or export documents or declarations are untruthful, it would mean violation of (non-compliance with) Chinese customs law. Therefore, the customs audit scope, taking truthfulness and legality as a whole, is to identify any non-compliances relevant to import and export activities.
The scope of audit will be indicated on the audit notice. It can be narrow or wide. Mostly likely customs audit may focus on HS codes, value, royalties, country of origin, export control and so forth.
II. What can trigger the customs audit?
Customs audit can be triggered for many reasons. The customs audit can be a routine one randomly pre-determined by the local customs. Each year the local customs must audit certain number of companies within its jurisdiction.
Customs audit can also be ordered by one of the Customs Taxation Bureaus or the audit division officer if he/she finds out a clue for possible non-compliance. Such Bureaus conducts post-clearance supervision through mega data analysis of all import, export and bonded goods across the country. When it identifies risk, it will instruct local customs in charge of the company to run customs audit. Compared to the routine audit, this is normally a special audit with a specific limited audit scope.
Since 2017 China Customs has initiated special audit campaign on dutiable issues concerning outbound royalty payments. This audit is triggered by the instructions from General Administration of Customs of China and many companies were audited for this purpose and paid duties for such outbound royalty payments. This is a special audit as well.
III. Which customs can audit your company in China?
Since the Automated Clearance Reform, normally the audit authority is the customs in charge of the targeted company in China, e.g. the customs of a place where the company is registered.
IV. What can customs auditors do in an audit case?
In the audit the customs auditors or their authorized third party may request to review all documents related to import and export activities. Such documents includes three-year accounting books, customs declaration documents, import and export records, resale records and so forth. It is the company’s legal duty to properly compile and retain these documents and records.
There must be reasonableness in a request of the customs for any data or information. If any data or information if obviously not relevant to truthfulness or legality of imported or exported goods, the company could raise an objection to refuse provision of such data or documents.
V. What are the legal obligations of the target company?
The company has a legal duty to cooperate with the customs, provide necessary space to the audit team and submit documents as requested by the customs auditors.
The company is not supposed to refuse or delay in providing the customs with the accounting books, documents and other related materials as well as related electronic data, nor to transfer, conceal, falsify or destroy accounting books, provide false information to the customs auditors, or conceal important facts. Any violation of this duty may result in administrative or criminal punishment to the company or the responsible personnel.
VI. What is prescribed for customs audit procedure?
1. Notice of audit
A customs audit must start with a formal notification to the company 3 days before the audit.
In urgent cases where the documents or goods may be transferred, hidden or destroyed by the company, no advance notice is necessary and notice of audit can be served on the day when the dawn-raid audit starts.
2. On-site audit
The customs must dispatch at least two auditors to conduct the on-site audit. These auditors must show the company their Customs Audit Certificate before they start the audit.
When conducting audit, the audit team can visit and enter office, workshop and warehouse to examine goods, review and copy accounting books and other documents, inquire the legal representative and personnel. Sometimes the audit team may request all routine works suspended until the on-site audit finished. Audit team may also examine the bank accounts of the company. In the circumstances where the customs suspects that the documents may be hidden or destroyed by the company, the customs may seal up or seize the documents or goods during audit.
3. Pre-decision notice
If any non-compliance is identified through the audit, before a formal audit conclusion is made, the auditor will send the pre-decision notice to the company soliciting views from the company on the facts found and conclusions to be made.
4. Comment on pre-decision notice
The company may submit written comment on the pre-decision notice to the customs auditor within 7 days after receiving the same notice. The company must avoid imprudent admission of any allegation if it is not a fact.
5. Audit decision
If the customs audit does not identify any non-compliance, the auditor may directly make a decision without a need to issue the pre-decision notice.
If the audit team identifies underpaid import taxes, it will make decision of tax compensation.
In case that non-compliance is found out, the auditor will make a decision to transfer this case to ASB who has the authority to investigate illegal activities and make administrative punishments. ASB will conduct the criminal investigation if it suspects that the illegal activity was conducted intentionally or knowingly on the part of the company or any given individual.
VII. Legal remedy
If the company does not accept the audit decision of tax compensation or ASB decision on administrative penalties, the company may apply for an administrative reconsideration to the customs of a superior level within 60 days after receiving the audit decision. If the reconsideration is not satisfactory, the company even can take legal action in the court against the reconsideration decision with 15 days after receiving the reconsideration decision.
VIII. Some tips to cope with customs audit
1. Advance trade compliance
Legal risks only exist in a customs audit case when the company did not ensure customs and trade compliance. Accordingly the most effective way to avoid legal risks in customs audits is to ensure customs and trade compliance in advance of the customs audit. Customs and trade compliance essentially means legal review in advance of all declaration factors for all import and export goods as well as implementation of such reviewed declaration factors in customs clearance procedures.
2. Contingent plan
The company shall set up a special task team to process customs audit and as the focal point to interact with the customs as well as to coordinate internal information exchange.
3. Criminal or administrative defense
Since the customs auditor may not always ask questions or request documents or information in favor of the company, during the process of customs audit, while cooperating with the auditor, the company needs to consider prompt legal review of the import and export documents, records and other information to identify risks and prepare promptly legal defenses so as to possibly eliminate the criminal offence of smuggling on the part of the company or any individuals, and alleviate the administrative penalties if any.
4. Interview and statements
Members of the company must carefully review the interview records prepared by the customs auditor before they sign or affix his/her finger print on the same. The company must follow a legal review process before submitting any documents and statements to the customs during the audit. When receiving the pre-decision notice, the company must seek advice on implications of different responses, if any, before submission of the response.
5. Burden of proof
Different burden of proof on the part of the company may affect the strategy of cooperating with the customs in an audit case. One example is royalties. If there is outbound royalties, the customs has the power to assume links of imports to the royalties and royalties will be dutiable based on the tariff rate and VAT on the same imported goods. In an audit case relevant to royalties, the company had better try its best to disprove links of imported goods to the outbound royalties.
Advance trade compliance is the best way to avoid legal risks of customs audit. If there is a customs audit, the best approach is for the company to keep a balance between cooperating with the customs and being defensive. This is the difficulty. Good customs lawyers can help the company to ensure advance trade compliance, and protect the company and management as far as possible while cooperating with the customs in the audit case.