An article from CBCNews “B.C. winery owners facing life in Chinese prison for alleged smuggling” that indicates to the trial over the married ABC couple, started on May 26th, is a clear message why you don’t want to end up having problems with China customs.
In 2015 the China Customs reported total goods imports of USD1.7tr. But the actual payment importers made was much higher, at USD2.2tr. The difference is a stunning half trillions of US dollars. And most importantly, China’s tax revenue relies primarily on indirect taxes, such as the value-added tax. Where is all the missing money?
There is strong statistical evidence for underreporting of exports at Chinese border to avoid paying VAT. There is also indirect evidence of over-reporting. The recent changes to the Regulations on Customs Audit as well as the boost in China Customs’ audit capabilities have made firms alert. Enterprises can expect China Customs to heighten their efforts to complete audits of all importers, exporters and processing trade manufacturers. Moreover, over-reporting imports appears to be the most important channel of capital outflows.
Article 26 of the Regulations on Customs Audit states that customs violations discovered during Customs audits will be dealt with in accordance with the Customs Law and the Implementing Regulations on Administrative Punishment.
That is, what is happening to Mr. Chang and Ms. Lu. Canadian couple. They declared their ice wine from Canada at around 10 Yuan a bottle (under $2). It was worth many times that amount. Moreover, their family owned Lulu Island Winery is considered one of the largest winery in Richmond. They produce table wines, fruit wines and…ice wines and claimed its exports accounted for almost 20 per cent of all Canadian wine exported to China. We can only assume, how long their under-reporting has lasted and how much China Customs claims to be the short-payment. Hence, A B.C. husband and wife are facing 10 years to life imprisonment in China for allegedly under-reporting the value of wine they export to that country.
There are some good news for other companies possibly facing charges. On 12 July 2016 was made a notice by Huangpu Customs on the Initiation of Voluntary Disclosure Program Specially Targeting the Automotive and Electronic Industries. They requests importers and manufacturers of automobiles, automotive parts and electronic products to make voluntary disclosures from the date of announcement.
Enterprises are encouraged to make voluntary disclosures to the Customs audit division in relation to the under-reporting of royalty payments, which may need to be included in the value of the goods for customs valuation purposes. The self-disclosure must be undertaken prior to receiving an audit request from China Customs and before China Customs discovers any under-reporting. Self-disclosing enterprises may receive reduced or no administrative penalties in accordance with the regulation.
Given the multitude of changes in customs requirements and China Customs’ enhanced capabilities in terms of regulatory authority, human resource and access to information, enterprises need to pay special attention to China Customs’ “amnesty” program – the voluntary disclosure mechanism. Particularly if company did not include royalty fees when valuing goods for customs purposes. One automotive enterprise located in northern China has already completed a voluntary disclosure. They made duty short-payment of RMB 18 million to Customs.
If you are curious to know the models companies use for saving from tax payments, here are few pages, where you can click on – US International Trade Commission and Avoidance Behaviours of Exporters and Importers.
It may be time for enterprises to conduct their own customs compliance audits to determine their level of compliance and identify any areas of potential exposure. Regarding over-reporting and money outflow, that’s another topic.