Handling customs price inspection and compliance

By Jia Xiaoning and Ning Jing, AllBright Law Offices 
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Customs price inspections check the authenticity and legality of declarations by enterprises of “elements related to dutiable value” in import and export activities (dutiable elements). Due to numerous dutiable elements, price inspections frequently have far-reaching effects on the interests of businesses, and even entire industries.

This article provides an overview of the areas of focus, common results, legal responsibilities of companies, and compliance responses in recent years regarding customs price inspections.

RECENT INSPECTION FOCUS

With improved informatisation, professional ability and risk judgment in recent years, more and more attention is being paid to the following dutiable elements in customs price inspections.

customs price inspection and compliance
Jia Xiaoning
Senior partner
AllBright Law Offices

Royalties. Royalties are fees paid by a buyer to obtain the licence or transfer of patents, trademarks, know-how, copyright, distribution rights or sales rights from the rights holder or person authorised by the rights holder.

Special relationship. Customs is concerned about whether the special relationship between affiliates of multinational corporations affects the transaction price (including whether the transfer pricing policy is fair and reasonable).

Place of origin. Whether an enterprise truly and accurately declares the origin of goods, or falsely declares the origin to enjoy preferential tax rates.

Shipping surcharges. Whether the transportation surcharge, overseas land transportation or port charges are underdeclared, or not declared.

Customs authorities often conduct preliminary investigations and target specific companies, industries or goods based on risk assessment; and then carry out targeted inspections in these areas, with a high success rate in identifying non-compliant behaviour. Therefore, businesses need to remain vigilant and responsive in these areas to ensure compliance with regulations.

COMMON RESULTS OF INSPECTIONS

Results of inspections can be summarised in three categories.

customs price inspection and compliance
Ning Jing
Senior legal counsel
AllBright Law Offices

Rectification or other measures. According to articles 30 and 31 of the Customs Inspection Regulations, if an enterprise is discovered to have engaged in one of the following four situations, customs will order it to make corrections: (1) providing false information to customs, or concealing important facts; (2) refusing or delaying the provision of account books, documents and related materials, as well as relevant electronic data storage media to customs; (3) transferring, concealing, tampering with or destroying customs declaration documents, import and export documents, contracts, and other material directly related to import and export business, as well as relevant electronic data storage media; (4) failing to prepare or keep customs declaration documents, import and export documents, contracts and other material directly related to the import and export business according to regulations.

If the enterprise fails to make timely corrections, customs will impose a fine according to the regulations. If the circumstances are serious, the enterprise will be forbidden from engaging in customs declaration activities. If the case constitutes a crime, the enterprise will be held criminally liable.

Collecting or recovering taxes. If the customs inspection reveals that an enterprise has underpaid or omitted to pay tax, tax collection or recovery is inevitable. There are three possible outcomes, depending on whether or not regulations were violated.

If the enterprise has not violated regulations, one year of tax will be recovered. If the enterprise has violated regulations, three years of tax and overdue fines will be recovered. If the enterprise voluntarily discloses its violations of regulations, which customs recognises as voluntary disclosure, only taxes will be recovered, with no administrative penalty, and the enterprise may apply to reduce or be exempt from overdue fines.

Voluntary disclosure of taxation-related violations. Applicable conditions: Voluntarily disclosing to customs within six months from occurrence of taxation-related violations – or voluntarily disclosing to customs within six to 12 months from occurrence of taxation-related violations – and the underpayment or omission of tax is less than 30% of the dutiable amount, or is less than RMB1 million (USD140,000). As the latest legal basis, Announcement No. 54 of the General Administration of Customs in 2022 came into effect from 1 July 2022 to 31 December 2023.

Exceptions: Customs has obtained clues to violations before the report; customs has issued an inspection notice; an enterprise makes seriously inaccurate disclosures, or conceals other illegal acts.

Favourable policy: If an enterprise is recognised as having made voluntary disclosure, no administrative penalty will be imposed and the enterprise may apply to reduce or be exempt from overdue fines.

Handing to anti-smuggling department

If the inspection authority discovers that an enterprise is suspected of violating laws and regulations, the enterprise will be handed over to the anti-smuggling authority. If an investigation reveals that an enterprise violated customs supervision regulations or engaged in smuggling, the enterprise will be subject to an administrative penalty. If an enterprise is suspected of committing a crime, it will be handed over to the procuratorate authority.

LEGAL LIABILITY AND COMPLIANCE

Legal liability. After an enterprise is found in a customs inspection to have committed violations, it will mainly bear administrative and criminal liabilities. For specific violations of laws and regulations, please refer to the Regulations on the Implementation of Customs Administrative Penalties.

In addition, the enterprise will be held legally liable for violations of laws and regulations, and may have its credit rating downgraded. If it is downgraded to be a dishonest enterprise, it will face many adverse disciplinary measures such as an 80% or more import and export inspection rate, increased inspection frequency, and delivery of the insurance deposit in full.

Compliance suggestions. An enterprise should establish and improve its internal compliance mechanism, set up a red line for the declaration of dutiable elements, and immediately start the emergency mechanism once a red line is triggered. It should also conduct self-examination regularly, make good use of customs price pre-determination procedures, and strengthen precautionary measures.

If an enterprise discovers in its self-examination the underpayment or omission of tax, it should consult lawyers on the timing and application of voluntary disclosure so as to take measures to minimise losses.

If customs has notified an enterprise of a price inspection, the enterprise should immediately invite lawyers to judge the trend of the matter, effectively claim rights and interests, and prevent the loss from expanding and causing greater risks.

Jia Xiaoning is a senior partner and Ning Jing is a senior legal counsel at AllBright Law Offices

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AllBright Law Offices
11/F and 12/F, Shanghai Tower
No. 501 Yincheng Middle Road
Pudong New Area, Shanghai 200120, China
Contact details:
Tel: +86 21 2051 1000
Fax: +86 21 2051 1999
Email:

jiaxn@allbrightlaw.com

ningjing@allbrightlaw.com

www.allbrightlaw.com

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