China


Understanding the customs and trade landscape in China 

In terms of total output, China is now the world’s second largest economy, second only to the United States. The quick rate at which China has moved towards a free market economy has allowed many multi-national companies to enjoy rapid growth not only by using China as the centre point of their manufacturing and distribution activities but by also tapping into the growing domestic demand for goods . However a more dynamic business environment has bought with it an increase in regulatory complexity at every level. This may now be leading companies to temper their growth outlook due to concerns about transparency and the fairness of the playing field.

The regulatory environment in China is complex and continually evolving. The decentralised structure of Customs and CIQ creates local interpretation, resulting in a gap between the national regulations and the local practices. For example, standard operating practice for Processing Trade is different in Southern China when compared to the rest of the country. Meanwhile, business models often evolve at a much faster pace than the regulations. Companies can conduct self-assessments, implement best-in-class procedures, and adopt other customs automation strategies in order to ensure compliance and avoid unwanted surprises.

It is our experience that companies with a “best in class” customs programme typically started from a low baseline. In many cases companies have been subject to a Customs investigation (including employee detention) and significant financial, operational and reputation exposures resulted. Consequently a new approach to resourcing the customs function and elevating its priority in company strategy has significantly improved their compliance record in China.
 

Our services

Our specialist customs and international trade practice provides a wide range of tailored solutions, including:

Creating value

  • Upgrading the enterprise classification
  • Using free trade agreements
  • Applying Interim Duty Rates
  • Customs supply-chain business modelling
  • Upgrading the customs handbook
  • Reducing the VAT leakage on exports
  • Optimising use of bonded zones
  • Optimising duty-free quota for imported capital equipment
  • Establishing and managing a customs centre of excellence in China
  • Establishing bonded international repair centre
  • Assisting in response to the imposition of anti-dumping duties and implanting a strategic plan to reduce/eliminate such duties

Ensuring compliance

  • Managing customs valuation and transfer pricing documentation
  • Establishing and implementing KPI/KOI for customs and trade compliance
  • Conducting compliance assessments
  • Conducting training
  • Obtaining advanced ruling on tariff classification and goods valuation
  • Conducting tariff classification technical analysis
  • Completion of foreign exchange verification and cancellation for trade payables/receivables with the State Administration for Foreign Exchange (SAFE)
  • Completing commodity inspection, import/export licensing and related matters with the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) , the Ministry of Commerce (MOFCOM) and the Ministry of Environment Protection (MEP)
  • Evaluating and assisting in selection of customs brokers and I/E agents
  • Managing customs handbook
  • China export controls — Export general license for dual-use items

Managing risk

  • Defence documentation for Customs disputes on tariff classification and valuation
  • Best-in-class operating procedures
  • Tactical and technical support during audits and investigations by customs officials Tactical and technical support during audits and investigations by intermediate agency

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Case studies

Managing an investigation triggered by a disgruntled employee

An employee of the client left involuntarily and as a consequence reported alleged under-valuation of imported goods to the Anti-smuggling bureau (ASB). The ASB initiated an investigation that entailed the temporary detention of employees, seizure of documentation and extensive interviews. Incoming shipments were held at the port and significant cash deposits collected.

How we helped

We firstly assisted the client to release the employees from temporary detention and to release incoming shipments. We then independently reviewed the technical customs valuation issues and alleged offence. As a result, robust defence documentation, which linked transfer pricing and customs valuation, was prepared and submitted to the ASB that supported the past import declarations. Tactical advice was provided to the client in respect of how best to resolve the case.

Benefit for the client

There was no criminal prosecution of the company or employees. The claw-back of customs duties and financial penalty was reduced. The company's reputation suffered no long-term damage and business continuity was ensured.

An unbalanced handbook and “missing” capital equipment

The client's customs handbook did not balance and duty-free capital equipment was missing. The Customs authority therefore assessed a claw-back of customs duties and imposed financial penalties. The Enterprise Classification was downgraded from "A" to "B" and the external auditor required the financial statements to be qualified due to potential unquantified financial exposures.

How we helped

We conducted an independent compliance review that identified the root causes for the customs handbook imbalance and recommended solutions. We developed a compliance improvement plan, including transition to e-handbook, and new standard operating procedures. Cost saving improvements for bonded transfers and outsourced processing were also identified. Several months later we completed follow-up compliance testing to ensure that the recommendations were implemented and that customs compliance levels were satisfactory. We also reviewed the supply-chain for relevant Free Trade Agreements, and changed procedures to take advantage of lower duties in destination markets for future exports.

Benefit for the client

No further assessments for claw-back of customs duties and financial penalty were made by the Customs authority. The auditor no longer required qualification of the financial statements and the Enterprise Classification was reinstated.

Lowering the cost of sourcing for North American customers

The cost of sourcing from China was becoming even more expensive due to inflation and labour cost increases, appreciation of the RMB, and reductions in the export VAT refund rates. The client requested us to review the procurement supply-chain to identify cost saving opportunities and areas for improvement.

How we helped

We independently reviewed the sourcing model, VAT refund procedures, surveyed and interviewed selected vendors, reviewed the existing HS Codes, reviewed the INCOTERMS and export procedures. We also undertook high-level financial modelling that quantified potential cost savings.

Benefit for the client

Products were re-classified under a new HS Code, a pre-classification decision obtained from Customs, which resulted in the VAT refund rate increasing from 5% to 13%. A new procurement structure was identified that resulted in a reduction of VAT leakage equivalent to 1.5% of the value of the goods being sourced.

A foreign invested enterprise establishing a distribution centre

Our client's manufacturing base and consumer market was becoming increasingly China and North East Asia focused. Establishing a distribution centre in traditional locations like Singapore and Hong Kong would not have met the demands of the future business in terms of operating cost and lead times.

How we helped

We worked with the client to identify the correct bonded zone location, legal structure and operating model, so as to address the respective customs, supply-chain, foreign exchange, operational, tax, and transfer pricing issues. The distribution centre included non-bonded and bonded storage in a single-roof location, VAT refunds were secured, origin under Free Trade Agreements was preserved and a tax Permanent Establishment in China avoided.

Benefit for the client

A preferred Asia bonded distribution centre in China was established. The competing and sometimes conflicting tax, customs, legal and supply-chain requirements were successfully optimised.

 

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Contact us

Susan Ju
Partner, PwC China, Beijing
Tel: +8610 6533 3319
Email

Colbert Lam
Partner, PwC China, Shenzhen
Tel: +852 2289 3323
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Derek Lee
Partner, PwC China, Shanghai
Tel:
+86 21 2323 7733 (Shanghai)
+852 2289 3329 (Hong Kong)
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Frank Wu
Director, PwC China, Shanghai
Tel: +86 21 2323 3864
Email