China Customs announced on March, 24 March 2016 that additional information of import transactions will be collected. These changes will be effective from March 30, 2016. When submitting an import permit the following information has to be provided:
- Existence of special relationships (between the seller and the buyer)?
- Does the special relationship impair the import price?
- Confirmation on royalty payments
Almost all over the world customs duties are levied based on the transaction value (often the sales price) according to the legal principles stated in the WTO Customs Valuation Agreement (Agreement on Implementation of Article VII of the GATT 1994). Switzerland is one of the big exceptions, as for most of the products customs duties are levied based on weight and not on value. As a consequence, many Swiss companies might be a bit uncertain when topics such as Customs Valuation are raised.
What does the new customs declaration form mean?
Customs’ strengthened supervision on customs valuation and the correct declaration of an appropriate value when goods are customs cleared. It must be assumed that China Customs will regularly scrutinize import transactions. If a special relationship is affirmed the declared customs value will be questioned and supporting documentation will have to be provided. If no documentation is available, the dutiable values of imported goods can be re-assessed as deemed necessary by Customs (And who is keen for that?).
With respect to the upfront disclosure of royalty and licence fee information, importers should ensure the below criteria are met and documented to avoid a reassessment:
- The royalty and licence fees are not related to the imported goods; and
- The royalty and licence fees do not constitute a condition of sale.
If companies are not prepared and documented with respect to these new required information to be provided to China customs, the following potential risks may arise:
- Delay or disruption in customs clearance and supply chain bottlenecks due to queries on royalty and special relationship declared;
- Additional duty cost may arise from assessment of dutiable royalty or relationship impairment;
- If the authority reassess the customs value the origin determination and calculation could be challenged, specifically when Swiss companies are using the Swiss – China FTA;
- Penalty and duty clawback depending on the intent and nature of omission of requisite information on the declaration, which may trigger review of shipments in past 3 years;
- If assessed penalty, importer may face enterprise downgrading and more scrutiny on future customs clearance of goods.
What is the action plan for Swiss companies?
Swiss companies are well advised to implement a customs valuation documentation that does support the transactions. A review of license agreements is also recommended. A transfer pricing documentation may be taken into consideration but is not sufficient.
Customs Valuations is quite a complex topic and requires in depth knowledge and analysis of the situation. Not only in China but also in other Asian countries regular challenges and questions of declared customs values is usual and reassessment is a main revenue stream for governments.
Customs Valuation will also become more important with the implementation of the Union Customs Code (UCC) as of 1 May 2016. The changes (abolishment of first-sale principle, dutiability of Royalties will significantly increase due to stricter legal wording and inclusion of trademarks) are aiming for the same: to scrutinize declared values at import (and reassess them).
Finally, the new customs declaration form will require additional information about Country of origin/Final destination location, Trade region, maximum items per declaration increased from 20 to 50 and an additional checkbox for inputting the 18-digit unified social credit code.
For Swiss companies, but also for other that are importing into China, actions are required.