China: China Customs Focuses On Voluntary Disclosures And Under-Reporting Of Royalties

There has never been a better, or more critical, time than now for enterprises to review their operations and activities that are subject to scrutiny and regulation by China Customs. With the recent changes to the Regulations on Customs Audit as well as the boost in China Customs' audit capabilities, enterprises can expect China Customs to heighten their efforts to complete audits of all importers, exporters and processing trade manufacturers.

Clarity on Customs Audit

On 7 July 2016, the State Council amended the Regulations on Customs Audit (State Council Order 670). The amended regulations will enter into force on 1 October 2016. The revised audit rules further clarify, among other things, the scope and period of a customs audit, the procedures and processes of an audit, the mechanisms for self-compliance and voluntary disclosure, and the involvement of third-party intermediaries in a customs audit.

The revised audit rules also formalise the sharing of enterprise information. This means that China Customs can collect information related to the import and export of certain commodities and industries from related industrial associations, government bodies and enterprises as required for a customs audit.

China Customs has also increased the number of Customs accredited third-party auditing firms which can be appointed to conduct post-clearance audits of enterprises. The assessments of these third-party auditing firms can form the basis of Customs audits.

Royalties and Voluntary Disclosure

Article 26 of the Regulations on Customs Audit stipulates that violations of customs regulations discovered during Customs audits will be dealt with in accordance with the relevant provisions of the Customs Law and the Implementing Regulations on Administrative Punishment. The revision to Article 26 adds that if import/export enterprises voluntarily report any actions that violate customs regulations and cooperate with Customs, they may benefit from lighter or mitigated administrative penalties.

Local Customs offices in China are encouraging enterprises in their respective areas to actively make use of the voluntary disclosure mechanism to report any violations of the customs regulations. Examples are:

  • On 5 July 2016, Nanjing Customs issued its notice on the Pilot Program Regarding Proactive Voluntary Disclosure by Enterprises (Nanjing Customs No. 8/2016);
  • The 12 July 2016 notice by Huangpu Customs on the Initiation of Voluntary Disclosure Program Specially Targeting the Automotive and Electronic Industries requests importers and manufacturers of automobiles, automotive parts and electronic products to make voluntary disclosures from the date of announcement.

China Customs is especially focused on royalty fees. Enterprises are encouraged to make voluntary disclosures to the Customs audit division in relation to the under-reporting of royalty payments, which may need to be included in the value of the goods for customs valuation purposes. The self-disclosure must be undertaken prior to receiving an audit request from China Customs and before China Customs discovers any under-reporting. Self-disclosing enterprises may receive reduced or no administrative penalties and fines in accordance with the regulation.

One automotive enterprise located in northern China has already completed a voluntary disclosure and made duty short-payment of RMB 18 million to Customs.

Multiple Information Sources

Another recent change in customs procedures was issued under the General Administration of Customs ("GAC") Notice 20 of 2016 Regarding the Amendments to the Declaration Requirements for Import/Export Entry issued in March 2016. Enterprises must declare additional information when making import/export entries, including:

  • The special relationship (between the China entity and overseas parties);
  • The influence of special relationship on pricing; and
  • The payment of royalties.

With the new information now required to be provided as part of the customs entry documentation, enterprises will be legally liable if they mis-declare the information. In the past, the old declaration forms did not contain sufficient information for Customs officers to determine whether the good's value was affected by the above-mentioned situations. Even if a customs post-entry audit uncovered a low declared value due to transfer pricing or royalty payments, China Customs could not determine if the consignor or consignee had deliberately lowered the value of the goods and could only seek to make up for the duty short-paid. Now, China Customs will have the necessary information to verify past entries and determine if there is under-reporting of taxable royalties.

Furthermore, enterprises are additionally required to submit large amounts of information to the State Administration for Taxation ("SAT") for transfer pricing purposes. The two revenue authorities (SAT and China Customs) may share that information, creating the ability for both authorities to cross check information a enterprise submits to either authority. It is therefore extremely important that the information provided to both authorities is consistent, accurate and complete.

Given the multitude of changes in customs requirements and China Customs' enhanced capabilities in terms of regulatory authority, human resource and access to information, enterprises need to pay special attention to China Customs' "amnesty" program – the voluntary disclosure mechanism – particularly if they did not include royalty fees when valuing goods for customs purposes. It may be time for enterprises to conduct their own customs compliance audits to determine their level of compliance and identify any areas of potential exposure.

Originally published 1 September 2016

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