As a practice of criminal adjudication, the Supreme People’s Court and Supreme People’s Procuratorate often jointly issue judicial interpretations, which are binding on Chinese courts and prosecutors’offices. On September 10, 2014, a new interpretation on criminal smuggling came into force, with the following changes:
Corporate Crime of Smuggling
The new interpretation set out a 3-level hierarchy for seriousness of corporate smuggling crimes in terms of evaded import taxes (import duties and VAT included), which is CNY 200,000, CNY 1 million and CNY 5 million. The original threshold for conviction of corporate evasion of import taxes of CNY 250,000 was changed to CNY 200,000. If a company does not have trade compliance system, such threshold of CNY 200,000 as evaded import taxes can be easily reached for companies doing the import or export business on a continuous basis.
Repetitive Smuggling Acts below Conviction Threshold
Under the Amendment VIII to the Criminal Law of the People⊙s Republic of China, repetitive smuggling acts, though below the criminal conviction threshold in each instance, are deemed as smuggling crime, provided that the same party smuggling again after imposition for two times of administrative penalties due to smuggling acts within one year.
This provision is vulnerable to different understandings in practice. Accordingly under the new interpretation, the one year starts from the day when the first administrative penalty takes effect against the same party for smuggling act. From the starting point of such one year, if there have been two instances of administrative penalty decisions and another smuggling act of ordinary goods or articles, the same party will be held to be criminally liable for smuggling.
Timing for Ascertaining Evaded Taxes
The new interpretation prescribes calculation of the amount of evaded taxes. The amount of evaded taxes shall be calculated according to the tariff schedules, tax rates,exchange rates and dutiable value applicable at the time when the smuggling activities were committed. For smuggling crime for a period of time, it means that smuggling at different times may apply different tariff schedules, tax rates, exchange rates and dutiable values. Previously, the applicable time was the time when the smuggling was discovered. Thus, calculating the amount of payable taxes now becomes more complicated and technical.
Manipulated Use of Import or Export License
Under Article 21 of the new interpretation , use or borrowing import or exportlicense is clarified as smuggling of the goods or articles of prohibitive importor export goods, rather than ordinary goods or articles. Import or export of a quantity exceeding what has been authorized under a license by the same party will constitute smuggling of ordinary goods or articles.
Whoever evades or dodges payable taxes at the same time evades license requirement may constitute the crime of smuggling ordinary goods or articles, and shall be convicted and punished according to the punishment whichever is heavier.
Test for Accomplished Crime
According to this new interpretation, accomplished smuggling may possibly occur before release of cargo by the Customs. If the smuggling is found on a spot of customs supervision area, smuggling is deemed as accomplished. Smuggling by way of fraudulent declaration is deemed accomplished upon completion of declaration. Smuggling will also be deemed accomplished for the bonded goods or tax reduction or exemption goods if the same have been sold or cleared with the Customs for verification and settlement purposes.
Given the threshold of smuggling prosecution and conviction is lowered for corporate crime, the CNY200,000 threshold of evaded import or export taxes is easy to cross. In case of corporate smuggling, the company will be fined, and the manager knows or orders such fraudulent declarations and the person who implements such fraud will be subject to personal criminal penalty as well. Given such serious risks, companies need to strengthen their trade compliance measures in connection with non-tariff barrier requirements, HS code classification determination, transfer price valuation and royalty payments, to avoid potential cumulative liability risks.