Customs Measures Move With the Times

• Reflected a good combination of principality and operability

• A fit with modern development of processing trade the 2004 Measure introduced modern management concepts such as risk management, guarantee, entrance threshold, etc.

BACKGROUND TO THE DECISION ON AMENDING THE MEASURES

However, with the rapid development of the processing trade, problems are found in the practice of the customs' exercising their control, mainly, over the “outward processing” trade. For example, in the 2004 Measures, it is provided that finished products would have to be transported back to the trading enterprises which caused a lot of unevenness and trouble in practice. Moreover, the major operation was previously not allowed to be outwardly processed, which reflected a sea change in this respect.

KEY PROVISIONS OF THE AMENDMENT

The major effect brought about by the Decision is that the control exercised over outward processing is much less restrictive than that of the 2004 Measures.

The new Method made amendments to the definition of the term “outward processing” which, in the new Method, refers to “the act of a trading enterprise of, as a result of the restrictions from its own production characteristics and conditions, upon the approval of the customs and after finishing the relevant formalities, entrusting a contracting enterprise to process processing trade goods, and transporting the processed goods back to the trading enterprise within a prescribed time limit for final re-export.” It is a broader definition than that in the 2004 Measures which provides only for “processing a certain operation procedure with respect to the processing trade goods.”

Article 24 of the Measures is amended as: “Upon the approval of the competent customs of the place where the trading enterprise is located, it is allowed to not transport back the finished products and remaining material of outward processing as well as the leftover material, shoddy and defective products, by-products and other processing trade goods produced in that course.” In sharp contrast, it was a mandatory requirement in the 2004 Measures that an operating enterprise shall transport back to itself such processing trade goods as the finished products, leftover materials, residual materials, inferior products, and by-products, which is basically everything that is generated in the outward processing.

Item 2 of Article 25 of the Measures is deleted. Item 2 of Article 25 of the Measures used to provide that where “the operating enterprise contracts the major operation in a processing procedure to others for processing”, such processing will not be approved by the custom.

In order to make the regulation more suitable for its role as a guideline, Article 3(1)(12) regarding inspection by the customs is deleted to be consistent with Measures of the Customs of the People's Republic of China on the Customs Inspection. Article 42 is amended so that the provision will be consistent with relevant provisions as set out in the Regulation of the People's Republic of China on the Implementation of Customs Administrative Penalty.

NATURE OF THE DECISION

The amendment to the definition reflects the market's needs. This is especially so in high tide of the market whereby it is difficult for enterprises to split the process into different operational procedures and outwardly contract the less important procedures for processing, as a result of when a large order is placed thus requiring a large amount of materials to be processed in whole or in part. An artificial requirement will cause problems to the effective control of the customs as it will also bring disadvantageous effects to the import and export trade and economy as a whole.

The second amendment - the finished products and remaining material of outward processing as well as the leftover material, shoddy and defective products, by-products and other processing trade goods produced in the course of outward processing is allowed by the customs not to be transported back to the original trading enterprises - was also deemed as a defective regulation in past experience. It was discovered that while the processing of goods may produce finished products at the same time, it may also produce a large amount of waste and obviously transporting it back will not only increase the costs to the enterprises but also increase costs to society as well as the environment.

The control pattern with regards to “outward processing” as set out by the 2004 Measure not only added difficulty to the Customs to exercise effective control over “outward processing”, but also placed the enterprises in a disadvantageous position. Outward processing is subject to the approval of customs. A criteria for the customs to grant approval under the 2004 Measures was that the outward processing can not be a major operation in the processing of goods. However, the processing trade by itself is a rather complex area of practice which usually involves various participants from all walks of life, and was therefore, difficult to determine what the major operation in the process is. It was also foreseeable that a lack of standard would fetter the efficiency of the customs to exercise control. It also unnecessarily restrained the free hand of the processing market, and ran against the market trend that job allocation will be proportioned according to the special area of different levels of market participants. In light of the above, the restrictive provision was deleted as a call of development.

SUMMARY AND LIKELY EFFECT OF THE DECISION

To better implement the new Measure, according to the General Customs, further notices and publications will be issued to go with the Measures. The procedure for their exercising control over outward processing will be made clearer, responsibilities in the tax collection and information management systems will be further allocated. What's more, a management system for controlling outward processing called H2000 has been recently developed and is now being tested in some local customs in Guangdong Province, where outward processing trade has been playing a leading role since China's opening up.

One official from the General Administration of Customs claimed that, from a macro point of view, the Decision is in favour of the reform and upgrade of the processing trade and the development of foreign trade economy. From a micro point of view, the issuing of this Decision will help the customs to reduce their administrative red tape, shorten prolonged procedures and will promote the concept of reform that will further simplify the system for administrative approval.

As always, time will be a better judge. Spectators, however, will be pleased to see that this Decision to a certain extent endorses the Chinese government's increasing flexibility and its resolution and ability in learning from past experience and in improving the China's trading environment.

*About the author

Peter Murray is a partner at Ince & Co and his practice area covers all aspects of shipping and trade in China including shipbuilding and related finance. He has been based in Asia for 26 years and for the past eleven years in China. Peter has been recognised by the Asia Law & Practice survey as a Leading Lawyer in Asia in the fields of Shipping, Maritime and Aviation for the part three consecutive years. experience in China.