Potential importers to the People's Republic of China rejoiced when the country joined the World Trade Organization in December 2001. The reason: China reduced its average tariff levels to approximately 11-12 percent – down from 42 percent in 1992. The trouble was this reduction in tariff levels resulted in a significant loss of revenue to the Chinese government.
So in early 2002, the Chinese government initiated a complicated policy for China's General Administration of Customs (Customs) to counter tariff reductions by increasing its revenue collection efforts. These efforts would impact industries that contribute the lion's share of the revenue include machinery and electronics, automobiles and spare parts, crude and refined oil, steel and organic chemicals. Customs also increased its investigations in all major ports of entry and trade zones, though these investigations and the administration's application of customs laws is inconsistent among ports.
The revenue collection efforts follow an ongoing aggressive pattern of investigations against domestic and foreign businesses. Local customs investigators often ignored procedural safeguards during investigations by:
- Detaining goods, employees, and assets of importers without basis or following administrative procedures
- Making threats of criminal prosecution and unfounded claims of smuggling to frighten local employees who would otherwise cooperate with authorities and to place foreign companies in an adversarial position with its staff
- Refusing to conclude investigations until importers compromise spurious claims
- Employing other tactics designed to increase the level of revenue collection
These factors make it important for companies importing into China to establish a customs compliance system, monitor customs practices, and prepare to defend against Customs if it acts illegally.
Customs Regulatory System
The General Administration of Customs is responsible for customs operations and for ensuring customs laws and regulations are administered throughout the country. Customs personnel are under a statutory duty to enforce the law in an impartial and diligent manner. This responsibility extends to:
- Monitoring and controlling merchandise which passes through the customs territory of China
- Assessing and collecting any applicable duties, taxes and fees on imported merchandise
- Investigating and preventing smuggling into the country
- Compiling trade statistics
- Enforce and carrying out customs laws and regulations
Generally, the consignee of imported goods is required to make an accurate declaration at the time of importation. Imported goods must be declared to Customs within fourteen days of the arrival of the means of transport. If the consignee fails to make declaration within the required time period, a fee may be assessed.
Valuation of Goods, Assessment and Payment of Duties
The clearance and release of import and export goods will not be granted before applicable duties and fees are paid in full, unless Customs grants a special authorization for release. Customs duties are levied in accordance with the established import or export tariff rates and as may have been reduced pursuant to WTO tariff reduction commitments. Tariffs are generally assessed on an ad valor basis. The consignee of imported goods is legally responsible for payment of customs duties and fees.
Generally, payment of import duties and import value added tax must be made within fifteen days from the issuance of a duty memo by Customs. Failure to meet this time limit will result in the assessment of a penalty. When the delay exceeds three months, the administration may issue a demand for payment or may proceed with forfeiture and auction of the goods.
Post-WTO China has committed to abide by the Customs Valuation Agreement which prioritizes the five methods to determine Customs value of imported goods. Pursuant to China's Customs Valuation Measures, Chinese law provides that Customs shall examine and determine the dutiable value of import goods based on the transaction price, defined as the price actually paid or payable by the buyer for purchasing the goods, subject to any adjustments for fees, costs or royalties. The transaction price must include the freight, relevant expenses, and insurance incurred before the unloading of the goods at the port of discharge inside China.
Customs still uses reference price lists to determine dutiable value without regard to true transaction value. In negotiations for China's accession to the WTO, WTO members expressed concern regarding the practice of using minimum or reference prices for certain goods, which would be inconsistent with the Customs Valuation Agreement. China agreed to cease the practice of using minimum or reference prices, although the practice still exists.
When determining the dutiable value of import goods, Chinese law requires the addition of various expenses or costs including:
- Expenses for containers that are an integral part of the goods
- Packing materials and packing services
- Assists costs
- Royalties payable by the buyer to the seller which are related to the goods and constitute a condition of sale of the goods.
For these expenses or values, the consignee shall provide objective and quantified data and information.
The consignee of the imported goods must truthfully declare the transaction price of the import and export goods, and provide documentation, written materials and electronic data necessary to demonstrate the validity of the declared value. Upon request from Customs, the consignee of imported goods must provide supplemental information to substantiate the relationship and transaction activities between the buyer and the seller and other materials in relation to the declared value.
If Customs questions the accuracy of the declared value, Customs must inform the consignor and consignee in writing of the reasons for its concerns and may request further clarification. If, within fifteen days of the service of written notice, the consignor and consignee fail to provide supplemental information, or, after verifying the provided materials, Customs still questions the accuracy of the declared value, it may reject the declared value and assess a dutiable value.
The parties to an import transaction may submit a written application to Customs for the issuance of an advanced ruling on the method for determining the dutiable value of their goods. If Customs must postpone a determination of valuation, the goods may still clear customs subject to the posting of security to cover the duty. However, Customs must complete the valuation assessment process within ninety days after posting of the security.
If Customs suspects that a special relationship between the buyer and seller impacts the transaction value of imported goods, it must provide notice to the parties and may request addition information which indicates that any special relationship does not affect the declared transaction value.
China is a contracting party to the International Convention on the Harmonized Commodity Description and Coding System and observes the Harmonized Tariff Schedule (HTS) for its tariff organization, nomenclature, interpretive rules and numbering system. If an importer is unsure of the classification of its goods, it may informally consult with Customs on classification issues prior to importation. Any information received from Customs is advisory and non-binding.
Rules of Origin
To determine rates of duty, Customs adopted regulations that outline the rules of origin. The country of origin is defined as the country where the goods are "wholly obtained or produced." Goods that are produced in more than one country originate in the country where they underwent the "last, substantial, economically justified processing," which means that they encountered a tariff shift or a value of thirty percent or more was added to the final product. The importer, upon request from Customs officials, may be required to provide a certificate of the origin issued by a foreign competent authority.
While not prohibited from entry, certain types of products are subject to inspection, import licensing and approval such as pharmaceutical products and medical devices, used mechanical and electrical equipment, food products and audiovisual products.
Enforcement of Customs Laws
Customs has a number of administrative tools to enforce customs laws and regulations including monetary penalties, detention, exclusion, confiscation and forfeiture. Customs may also refer a matter for criminal prosecution.
Smuggling exposes an importer or other responsible party to both administrative and criminal penalties. China Customs broadly defines smuggling to include:
- Importation of restricted/ prohibited goods
- False declaration of restricted/prohibited goods
- Undervaluation of goods by providing false declarations
- Unauthorized sale of goods in a bonded zone
- Unauthorized sale of goods imported under duty free programs
A party that knowingly purchases or transports smuggled goods is subject to the same administrative and criminal penalties as the party liable for the actual smuggling.
A party that engages in smuggling activities is subject to a monetary fine of RMB 50,000 (US$6,067), confiscation of goods, and in situations involving undervaluation, a monetary penalty up to the value of the goods or three times the duty evaded. If smuggled goods or articles cannot be confiscated, a sum equal to the value of the item may be recovered.
If an act of smuggling is committed by two or more persons, Customs may issue penalties individually in accordance with the seriousness of each case and in accordance with each person's level of culpability. If an individual has knowledge of an act of smuggling and fails to report the matter, illegal gains will be confiscated and a fine of up to two times the amount of those gains may be imposed.
Customs has the authority to pursue administrative sanctions for activities that do not constitute smuggling including:
- Unintentional undervaluation of dutiable value of imports
- Failure/ refusal to properly mark imported merchandise with the country of origin
- Misclassification of merchandise
- Inadequate records and documentation to substantiate a customs transaction
- Importation/exportation of prohibited or restricted merchandise which is declared
For violations of the law that do not fall within the definition of smuggling, Customs may impose a monetary penalty ranging from RMB 5000 (US$605) up to the value of the imported goods.
If a violation of customs supervisory or control provisions is not discovered until at least three years after the violation occurred, the party concerned is exempt from a penalty.
Customs may detain goods or means of transport for any suspected violation of the law. In certain situations, Customs may release the items and demand a security deposit or collateral in the same amount of value as the impounded items. Since customs bonds are not recognized in China, Customs usually requires cash as a security deposit.
A foreigner who fails to pay duties or a penalty imposed by Customs must post security or other form of collateral equivalent to the amount due. If customs officials have reasons to believe that the funds are the result of a violation of customs laws and regulations, they may confiscate a foreigner's bank account.
Customs must issue a written penalty notice to the interested party for any act of smuggling or other violation of customs laws and regulations. If an interested party disagrees with a penalty decision of Customs, the party may file an application for review with a higher level of Customs within thirty days of receipt of the penalty notice. A decision on a review application must be made within ninety days. An interested party may appeal an administrative review decision by filing a complaint with the intermediate level People's Court within thirty days of receiving the decision. In addition to an appeal of an administrative review, an interested party may also file an action directly with the People's Court for review of an original penalty notice. A party that elects the remedy of judicial review is not permitted to file an application for administrative review with Customs. The court process is a less than perfect forum for resolving disputes, although the quality of the courts is improving.
Customs can pursue criminal prosecution for:
- Significant undervaluation
- Intentionally failing to declare the importation or exportation of prohibited or restricted merchandise
- Falsifying records and documents used to substantiate a Customs transactions
Criminal penalties under customs laws and criminal laws include capital punishment, imprisonment, detention, confiscation and fines.
If underpayment of duty is a result of a violation of customs laws and regulations, the limitations period for collection is three years from the date of importation. For actions that are considered criminal violations, there is no statute of limitations.
Customs Audits and Inspections
Customs may demand production of various documents including customs declaration documents, accounting books, financial statements, accounting vouchers, computer records, and other relevant data that has a direct relationship to the import/export activities of the company in question. The administration also may demand documentation supporting a customs transaction within three years of the importation date. Customs is only required to give an enterprise three days written notice before conducting an inspection of the production facilities, and to question employees and managers on customs transactions.
Customs Compliance Strategies
Given the complexity of Chinese customs laws and their inconsistent application, it is important for companies importing into China to establish a customs compliance system and to monitor customs practices. Importers should adopt a China-tailored customs compliance program based on the US customs reasonable care standard, that is, company policy requires customs transactions to be handled with reasonable care, to comply with both the law and practice, and to be fully substantiated by supporting documentation. Documentation should be maintained to reflect the basis for decisions concerning valuation and classification, and legal opinions obtained concerning to these issues.
An overall compliance strategy should also include an internal or neutral third-party audit of customs practices to determine if practices are inconsistent with current requirements.
Employees and managers in China should be trained in China's customs laws, regulations and practices, and on company compliance policies. Since the "Chinese way" of addressing customs issues may be inconsistent with China's written laws and WTO obligations, employees should be trained to exercise caution in dealing with customs transactions. For example, corruption by underpaid customs officials is rampant and while engaging in corrupt practices may be the "Chinese way," such practices violate China's own written laws. In addition, communications with Customs should be delegated to trained and loyal employees. Problem investigations oftentimes are triggered by disgruntled employees over practices that they created. Hence, companies should not rely upon local employees to manage customs compliance practices in a country with a transitioning legal system.
Given that the practices of customs officials at the local level may be at odds with China's WTO obligations or national laws, importers should closely monitor the practices of customs officials at the local level and raise any non-compliance issues at the national level, despite spotty national compliance enforcement. Similarly, it is important that importers raise any non-compliance issues with the US Embassy personnel that actively monitor China's WTO compliance record (specifically the Trade Facilitation Office).
A compliance strategy should also include full cooperation with Customs. If in doubt, careful discussions with local and national authorities will help improve an importer's relationship with Customs and better gauge how Customs will react to certain issues.
With mounting pressure on the customs administration to collect revenue to compensate for post-WTO tariff shortfalls, importers must make customs compliance a priority, or risk losing a competitive edge in one of the world's burgeoning markets.