The importance of good customs advice for foreign enterprises

In terms of import and export duty advice, we help to determine those elements to be declared to customs that are essential in arriving at the amount of the import or export duties. Those elements include the description, price, quantity, country of origin and HS [harmonised system] codes of the import or export goods. The advice on HS codes is a process of classification of import or export goods, through which the goods will be assigned a HS code with the corresponding duty rate and mode of supervision by the customs, for example whether an import permit is required.

We also provide advice on duty-free and bonded goods arrangements. This also relates to import and export duties. HaoLiWen helps clients to reduce costs by utilising duty-free schemes, or bonded goods arrangements relevant to free trade zones, logistics parks or export processing zones. Our advice on import and export duties will help clients to avoid the risks of liabilities for non-compliance with customs regulations, while possibly reducing the import or export costs and expenses.

Can you tell us more about free trade zones?

Free trade zones are special customs supervision areas in which goods generally enjoy duty-free treatment if imported from overseas. There are around 16 free trade zones in port cities and scattered along the coastline of China. Free trade zones were once popular for their hub function for domestic trade when foreign-invested companies were not allowed to engage in foreign and domestic trade. However, free trade zones nowadays mostly function as warehouses on bonded basis. There are so-called logistics parks which are trade free zones but with one more function – that is, any goods entered into such parks from other domestic areas will be treated as exported for tax refund purposes. Therefore, logistics parks attract more outbound goods than free trade zones.

However, if any factory in China intends to engage in import processing trade – if the factory imports the components and exports the finished goods after assembly, for example – such factory can import the goods on bonded basis using a customs bonded goods handbook without the need to channel such import through free trade zones or logistics parks. Such convenience of bonded goods arrangement, if not prudently managed, may trigger customs liabilities for authorised domestic sale of either the bonded components or the finished goods.

What is your aim when helping clients with their legal defence in customs proceedings?

The goal of such a defence is to assess and quantify potential exposures, and try to avoid corporate and personal criminal liability, or reduce administrative liabilities, or even eliminate the administrative liabilities, as the case may be. As soon as a client is investigated by customs, we can help them in making out this legal defence.

What makes HaoLiWen special?

Our customs and tariffs practice enjoys a unique position in the legal market of China. We have a large client base regarding customs matters. Clients approach us often as the first contact for their customs-related issues and problems. We have a devoted team consisting of seven customs attorneys and consultants, one of which was among the drafters of the PRC Customs Law. Finally, we are familiar with the practice of customs authorities in import and export activities as well as in customs investigation proceedings.

You say your firm's customs and tariffs practice is unique – can you explain why?

Our customs and tariffs practice is unique since it is far from easy to find a sizable customs and tariff practice in law firms in China. Such uniqueness can be attributed to two elements: the first is that PRC customs laws and regulations are so special and technical and it is not easy to establish such a practice in a short period of time. Secondly, as the practice of Chinese customs is not always transparent, it's difficult to understand without sufficient experience in this field. We have the expertise, and more-than-sufficient experience.

Is your customs practice more in the nature of tax advice than actual legal services?

No. Our customs practice is a typical legal service. First of all, the import and export duty adviser should have the ability to assess the legal exposure in case this matter is investigated by customs. It's dangerous to get advice on import or export duty matters without knowing the potential legal exposure. Secondly, all duty advice will be eventually reflected in the declaration made by the clients to customs in their import or export clearance. Any incorrect or improper declaration or non-declaration would immediately trigger the legal risks of administrative penalties and, frequently, the crime of corporate smuggling – this makes duty advice a serious legal matter. Finally, the basis for duty advice is the complex body of technical customs regulations and rules, and it makes sense for seasoned lawyers to advise clients on such rules. In customs investigation proceedings, seeking legal advice is a must as the difference between breach of customs regulations and smuggling is too subtle in a legal sense.

Some foreign companies may wonder why they need legal advice regarding import and export duties. What would you say to them?

The simple answer is that the corporate clients are facing a Customs authority that has not only administrative supervision power, but also police powers. Any declaration or non-declaration of import or export goods to the customs, if improperly made, may result in underpayment or evasion of import or export duties, or restrictive or prohibitive import or export measures. This would trigger risks of administrative and quite often criminal investigations. In criminal investigations, the management or operations staff are often detained by customs. They may be arrested afterwards if a prime facie case of smuggling is established. Therefore, in advising import and export duty matters, the adviser must know the legal consequences of its advice.

Apart from import/export, what other customs-related areas can lead to the need for good legal advice?

There are three other significant areas: transfer pricing, duty-free or bonded arrangements, and M&A due diligence.

With respect to transfer pricing that results in reduction in import duties, customs may suspect there were smuggling activities if the importer pays to the foreign seller extra money through other means. The transfer pricing adviser on import and export transactions must understand the risks and make them known to clients.

Under Chinese customs legal schemes, there are some special zones or arrangements which enable the company to import goods under duty-free or bonded arrangements, thus saving import costs. However, such special zones or duty-free or bonded arrangements can make it easy to make so-called short-cut shipments to domestic customers without proper customs clearance. This would expose the company to customs administrative or even criminal investigation. Therefore, caution should be used for companies who have duty-free or bonded arrangements in China and legal advice is a must to ensure customs regulatory compliance.

There have also been certain M&A deals where the buyer has been prejudiced by customs investigations triggered by certain customs clearance practices in the past on the part of the seller. If the buyer engages us to do legal due diligence on the custom regulations compliance of the target company, such prejudice can easily be avoided.

Is the current economic environment having any impact on your customs practice?

Our customs practice has not been affected. On the contrary, our customs team has been very busy as we have received more and more inquiries and instructions from clients who need urgent legal help in their customs-related matters. It has become obvious that, since early 2009, customs has intensified its investigation measures to detect and prosecute corporate non-compliance with customs regulations.

Deming Zhao can be reached in the Shanghai office of HaoLiWen PRC Attorneys (+86 21 5840 6188) or by email at [email protected] There is more information on the firm online at www.haoliwen.com