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Business evolution and growth
Many multi-national companies have grown rapidly, often through acquisition or joint ventures, yet have failed to capitalise on pooling their increased customs resources or sharing of customs knowledge and systems/processes. Organisations with a strong business unit level culture of independence often suffer similarly. Multinationals who have entered into joint ventures or have acquired local Chinese businesses often inherit flawed customs practices or under-resourced customs functions and either do not have the knowhow to put things right or encounter significant resistance to change.
The impact of Customs
Core customs competencies, such as product valuation, origin and tariff classification, impacts business at both strategic and operational levels. For example, the government implements certain economic and environmental policies by use of HS Codes, such as the Prohibition List for Processing Trade, and export VAT refund rates. So, incorrect tariff classification can have a significant negative impact where for example it determines whether or not a business can engage in bonded manufacturing and what amount of export VAT refund it can claim.
Best practice
You would think therefore that given these diverse and significant risks and potential lost opportunities that companies would have developed adequate resources and centres of excellence to manage the customs function but this is far from reality. There are many reasons for this and some are specific to China and its environment.
Although it is not always widely known, those current "customs best-in-class" companies typically started from a low baseline. In many cases, they have been subject to Customs investigation (including employee detention). Significant financial, operational and reputation exposure resulted. As a consequence, new resources were allocated to manage customs and trade in China.
The approach
At PricewaterhouseCoopers we believe that managing customs and international trade in China is best organised as follows:
Creating Value 
Now more than ever before, companies can proactively take steps to reduce customs duty and related supply-chain costs and improve operating performance. For example, companies using paper Customs Handbooks can upgrade to electronic Customs Handbooks. The new bonded zones can be used to reduce VAT leakage, lead times, and enable more efficient bonded transfers. Enterprise Classification can be upgraded in order to reduce clearance times and audit frequency. China's growing network of Free Trade Agreements can be used to legitimately reduce the customs duties that are assessed on imported and exported goods.
The regulatory environment in China is complex and continually evolving. The decentralised structure of the Customs authority leaves scope for local interpretation, which results in a gap between the national regulations and the local practices. For example, standard operating practice in Processing Trade is different in Southern China compared to the rest of the country. Meanwhile, business models often evolve at a much faster pace than the rules. Companies can conduct self-assessments, implement best-in-class procedures, and adopt other strategies in order to ensure compliance and therefore avoid unwanted surprises.
China Customs is a revenue-driven authority. In order to meet the revenue target set by the central government, Customs is employing a variety of supervision means to ensure customs duty and import VAT collection, including post-importation audits and criminal investigations. The closest scrutiny is given to such areas as customs valuation of related party transactions and the handbook operation of companies engaged in Processing Trade. Consequently, customs duty, consumption tax, and import VAT can become an even more significant cost in the supply-chain. Almost all companies are invariably selected for audit by the authorities at some point in time. Robust defence procedures and documentation should be in place in order to resolve an audit or investigation with minimal financial and reputation exposure, and a guarantee of business continuity.
Services Offered
Our specialist customs and international trade practice provides a wide range of tailored solutions, including:
Creating value
Ensuring compliance
Managing risk
- Defense documentation
- 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
Our experience
A foreign invested enterprise importing consumer products
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 we 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 defense 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.
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.
The cost of sourcing from China was becoming evermore expensive due to inflation and labor 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 modeling that quantified the cost savings.
Benefit for the client Products were re-classified under a new HS Code, per 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.
The client's manufacturing base and consumer market was becoming increasingly China and North East Asia focused. Establishing a distribution center 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 optimized.
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Managing customs and international trade in China (pdf file, 149KB) for your reference.
