On March 24, 2016, the General Administration of Customs (“GAC”) issued its Announcement [2016] No.20 (“Announcement”) revising requirements for filling out the Customs Import/Export Declaration Forms. Among them, the Announcement requests an importer of record, with respect to a given shipment, to declare to the Customs whether there has been any direct or indirect royalty payment made to an exporter or any other associated party.

A“royalty” refers to a payment made by the importer for the purpose of licensing a patent, trademark, know-how, copyright or other similar rights. Those royalty payments, if related to a given import shipment, may be dutiable as a part of the transaction value of the import shipment of goods in terms of customs duty and value-added tax (“Import Taxes”).

According to the Announcement, an importer of record must mark “Yes” or “No” on the customs declaration form when answering whether there has been any such royalty payment made to the exporter or any other associated party, whereby, for the first time ever, the declaration of royalties becomes one of the obligations of the importer at the time of customs declaration from the perspective of customs law. Any failure to make a proper declaration may subject the importer to not only additional payment of Import Taxes but also administrative penalties for general breach (such as fines or downgrading in Customs’ AEO program). The clearance speed and operating costs for the importer will also be affected. Moreover, should any intent be found in any improper declaration, the importer might also face a smuggling charge by the Anti-smuggling Bureau of China Customs.

Previously, the importer of record may only need to declare as such when the Customs raises a question of royalties. Often, at the importation, the importer was not required to voluntarily make such declaration. Even if any royalty payments were found dutiable, besides additional payment of Import Taxes, the Customs seldom imposed the administrative penalties or smuggling liabilities on the importer. However, it is not the case anymore with the Announcement.

The royalties are concerned with the patent, know-how, trademark, copyright, distribution right, resale right or other similar rights. In the customs practice, the question of being dutiable or not dutiable associated with royalties tends to be technically complex and legally complicated. For example, it is not an easy work regarding how to claim and prove in front of the Customs that a previous royalty payment was not related to a given importation, and how to determine the scope of dutiable royalties and the scope of those shipments that are subject to the relevant Import Taxes on the royalties. As the royalties declaration becomes an obligation of importer, the importer must, before presenting the customs declaration, figure out that whether or not any royalty payment should be counted into the transaction price of a given importation, and therefore, must be declared and subject to the Import Taxes accordingly. Undoubtedly, this requirement sets out a high bar for the trade compliance on the part of importers. Any failure on this regard might have the importers face serious customs risks on an accumulative basis.

It seems easy to declare no royalties and quickly clear the shipment. However, as China Customs tends to employ more resources and pay its supervision focus on the post-clearance audit or administrative and criminal investigation, imprudent declaration of royalties would result in high risks of accumulated liabilities to China Customs. Every member of the trade community should be aware that the day-to-day management of royalty payments has become a serious trade compliance issue, and the resources must be committed beforehand to ensure the compliance and avoid subsequent high risks.