[Edited from the article to publish in German on Der Zoll-Profi (The Customs Professional).]
By Deming Zhao
I. Features of China Customs
China Customs is one of the most powerful state agencies in China. Unlike other state administrative agencies, China Customs has a division of the Anti-Smuggling Bureau (“ASB“) conducting both administrative and criminal investigations against companies and individuals in violation of Chinese customs law.
A company targeted by ASB will find it difficult to know the nature of its investigations, as no written notice of investigation may be served on the targeted company. The ultimate nature of such an ASB investigation solely depends on what ASB may find out through the investigation. If ASB discovers an element of intent on the part of the targeted company, very likely ASB will treat such customs violations as criminal offence and initiate a criminal investigation.
Unlike other state administrative agencies, China Customs administers itself in a manner independent from other state departments and local governments. The China General Administration of Customs (“GAC”) is the highest authority of China Customs. It is directly responsible and reports to the State Council.
This means that China Customs is a hermetically closed system and the political influence often does not work unless from the State Council; this also means the annual political and fiscal policies of the State Council may greatly influence the trend and intensity of China Customs supervision and enforcement of customs laws and regulations.
II. Structure and Functions of China Customs
China Customs consist of the GAC, 42 district customs branches (“District Customs”) directly responsible to GAC, as well as more than 600 affiliate customs offices (“Affiliate Customs") under the control of District Customs.
China Customs is responsible for
1. supervising and controlling goods and personal belongings entering and leaving the customs territory,
2. collecting customs duties and other taxes,
3. detecting and suppressing smuggling and general violations,
4. producing customs statistics and handling other customs operations.
The GAC administers policy and administrative matters and does not normally play a role in the daily import, export and bonded and other goods supervision. District Customs and Affiliate Customs, on the other hand, are relevant to the import and export operations. The District Customs Branches supervise and investigate import and export declarations or operations of a significant nature. Affiliate Customs at different ports supervises, audits or investigates the daily import and export through the port of goods, whereas local Affiliate Customs supervises, audits or investigates all import and export operations of the company registered within their jurisdiction.
The GAC, District Customs and some Affiliate Customs also have a division of ASB. The ASB functions independently of other divisions of China Customs. The head of ASB is usually the deputy director of the given customs authority.
The ASB has the power to investigate and punish customs law violations by the importer or exporter of record. In practice, any customs violations detected by the clearance, audit or tariff divisions of a customs authority will be transferred to ASB for investigation if the underpaid amount of import taxes (duties and VAT) amounts to several thousand RMB.
III. Automated Clearance Reform
In 2016, China Customs launched the automated clearance scheme. As a result, most customs declarations are now made on-line without manual review of each shipment by the Customs. In accordance with this “self-declaration” policy of China Customs a company must take the legal consequences if it violatesates China customs laws and regulations.
The automated clearance scheme has also given rise to anxiety within China Customs that the import duties and taxes or security may be affected by incorrect or fraudulent declarations. Accordingly, China Customs has intensified pre-clearance risk control and post-clearance tax supervision.
1. New Risk Control Centers
There are three Risk Control Centers established under GAC since 2016. The Risk Control Center in Shanghai identifies and monitors entry risks of shipments by air as well as logistics companies responsible for such shipments. It can order cargo or vessel inspection, if necessary. The Risk Control Center in Huangpu, Guangdong Province, performs the same functions for shipments by land and the Risk Control Center in Qingdao, Shandong Province, for the shipments by water or sea.
These Risk Control Centers request and rely on cargo manifest declarations by the shipping companies before the clearance of the goods into China. Accordingly, the shipping company will ask the shipper or consignee to provide their identity number and other information of the shipper or consignee to enable the control centers to assess the potential risks of a given vehicle and cargo shipments.
2. Tax Collection Centers
Three Tax Collection Centers have been established which report to GAC. The center in Shanghai monitors import and export declarations for machinery and electronic equipment covering eight chapters of the Tariff Nomenclature (chapters 84-87 and 89-92) and 2286 HS codes in total.
The center in Guangzhou monitors declarations for chemistry and chemicals (chemical raw material, polymer, energy, mineral and metal), covering 30 chapters of the Tariff Nomenclature (chapters 25-29, 31-40, 68-83) and 2800 HS codes in total.
The center in Beijing and Tianjin monitors declarations for miscellaneous goods (agriculture and forestry, food, pharmaceutical, light industry, miscellaneous, textile and aircraft), covering 58 chapters (1-24, 30, 41-67, 88, 93-97) in Tariff Nomenclature and 3461 HS codes in total.
The three Tax Collection Centers may order inspections during clearance in the event of identification of tax-related risks relevant to customs valuation, tariff classification or country of origin, and make post-clearance queries, demand audits or liaise with ASB for investigation of customs law violations.
3. Implications for the importer or exporter of record in China
Given that China Customs does not normally pre-review what is declared, preferring instead to intensify post-clearance queries, audits and ASB investigations, the importer or exporter of record are exposed to possible severe customs-related legal liabilities if they do not have effective customs and trade compliance measures in place.
Such legal liability risks may not be initially apparent and, if not detected early, violations could accumulate. They may eventually become explosive and disastrous to the core interest of the business in China because of the heavy amount of penalties and guarantee in cash, seizure or forfeiture of the goods to which the violation relates, and the criminal liabilities of companies and individuals if they were aware the incorrect declarations of import and export goods.
In particular, tariff classification, customs valuation and transfer pricing carry very high risks and may be the focus of supervision by the Tax Collection Centers.
IV. Liability risks facing Foreign companies
If a foreign company has a subsidiary in China, the latter can clear its goods for export or import with China Customs provided the subsidiary has registered with local customs and obtained a customs clearance identification number. In this case, the Chinese subsidiary will be liable for incorrect declarations to China Customs.
Foreign companies may be exposed to liabilities under the following circumstances:
1. Export to China
Concerning exports to China, the foreign exporter may be contractually obliged to clear imports into China when for instance the delivery condition under the applicable Incoterm is “DDU” However, owing to Chinese customs regulations, the foreign exporter cannot clear import shipments with China Customs in its own name. In practice, the foreign exporter has to use the importer’s name to clear the goods.
In this case, the foreign exporter undertakes no obligations and liabilities to China Customs as it is not the importer of record under Chinese customs law. The importer, in whose name the goods is cleared into China, will assume declaration-related risks and liabilities and can seek recourse against the foreign exporter according to the terms of the contract.
However, if the foreign exporter deliberately submits incorrect shipping documents and invoices, the foreign exporter may implicate itself in criminal smuggling investigation by ASB.
2. Import from China
Concerning import shipments from China, the foreign buyer is not normally under contractual obligation to clear export shipments with China Customs. However, if the delivery term under the Incoterms is “EXW“, the foreign buyer has to process export clearance with China Customs and import clearance as well with foreign Customs.
Again, in this case, the foreign buyer has to use the Chinese exporter’s name when lodging the export declarations. The Chinese exporter will bear the risks and consequences of incorrect declarations and may have a right of recourse against the foreign importer. However, if the declaration is fraudulent known to the foreign importer, the foreign importer may be exposed to criminal liabilities to China Customs.
V. Conclusion
Subsidiaries in China of foreign companies may face a serious risk of ASB investigation if they do not have effective trade compliance measures in place. In order to avoid or mitigate such risks, we recommend regular legal compliance audit or health check to identify legal risks, cease and for the future avoid incorrect declaration or clearance practices to prevent violations from accumulating in the future. As far as past violations are concerned, the company may consider voluntary self-disclosure in which case China Customs may consider leniency in imposing any penalties.
The foreign company must refrain from knowingly providing false or incorrect shipping documents or commercial invoices when its counterpart is responsible for clearing the goods in China. This will substantially reduce (if not totally eliminate) the foreign company’s China customs-related risks when trading with counterparts in China.
