What companies need to know
With the new Tariff Law set to come into force on 1st December 2024, there are a number of things that companies need to be aware of. In this article, Nicolas Zhu of CMS China outlines some of the law’s key areas and how its provisions are likely to impact businesses.
On 1st December 2024, China’s new Tariff Law will come into effect.[1] The Import and Export Customs Tariff Nomenclature Rules,[2] which are an appendix to the new Tariff Law, along with the Imported and Exported Goods Taxation Administrative Measures and 33 customs regulations under Customs Decree No. 273,[3]&[4] will also enter into force the same day.
The new Tariff Law replaces the Import and Export Customs Tariff Regulation(the previous legal basis for levying customs duties)[5] and forms the new underlying legal provisions in the form of a law governing all customs tariff matters in China. Both the Tariff Law and the Customs Law[6] (which is currently under revision) will now form the legal basis for all customs matters in China.
In addition, from 1st December 2024, China will unilaterally scrap customs duties on the most underdeveloped countries (including 33 African countries) that have diplomatic ties with China in order to further business ties.
1. Overview
The new Tariff Law is the first law governing customs tariff matters in China. The purpose of the law is to standardise customs tariff administration to the same degree as other tax laws, and to bring it into line with national laws, such as the Taxation Administration Law,[7] the Legislation Law[8] and the Administrative Enforcement Law.[9]
The law also governs new business models, such as cross-border e-commerce (CBEC), and enhances the administrative powers of customs to implement administration and enforcement of customs tariff issues with regard to the customs harmonised system (HS) code classification, the place-of-origin determination and calculation of customs duties. The new law provides a strong legal basis for customs officers to enforce customs duty-related administrative measures, with customs enforcement previously having been underpinned by weaker administrative regulations. Customs control is likely to become more and more stringent in the coming years, with the entry into force of the Tariff Law.
2. The Tariff Law and daily operations
(a) Withholding liabilities on CBEC
The new Tariff Law clarifies that for CBEC, e-commerce platform business operators, logistic enterprises or customs declaration enterprises and/or other entities or individuals who have the withholding obligation under laws and administrative regulations shall act as the withholding agent for customs duty payments. Failing to act as a withholding agent can incur a customs fine of 50 to 300 per cent of the outstanding customs duty.
Neither the Customs Law, the Tariff Regulation nor the Customs Administrative Sanction Administrative Regulation[10]—nor the previous version of the Imported and Exported Goods Taxation Administrative Measures—contain any provision regarding the obligation of the withholding agent for customs duties and related penalties. Only a circular jointly issued in 2018 by different ministries (including the General Administration of Customs and the Ministry of Commerce)[11] provides for such a withholding obligation, but no provisions provide details on potential sanctions for breaches.
Foreign-invested enterprises involved in CBEC need to be aware of the potential penalties if customs duties are not properly withheld.
(b) Determining customs dutiable value
Article 26 of the new Tariff Law mentions that warranty repair service fees must now be included in the scope of customs dutiable value.[12] If any warranty repair service fee needs to be stipulated in a sales contract, the fee must be included in the customs dutiable value.
Apart from the aforementioned, the Tariff Law does not provide any new provisions related to determining customs dutiable value for royalties and services compared with the Tariff Regulation. In practice, quite a few local customs departments tend to use the opinions in the Guideline Book of the General Administration of Customs as a legal basis when determining the customs dutiable value, and tend to include all sorts of services in the final valuation.[13] If local customs departments continue to use this interpretation, foreign-invested enterprises can request that customs officers not use theoretical opinions as a legal basis when determining the customs dutiable value, in the absence of explicit provisions in this regard under the new Tariff Law.
However, the possibility cannot be excluded that customs departments may arbitrarily enlarge the general anti-tax avoidance rule under the Tariff Law (point 2 (e) below) to assimilate such services as a kind of tax-avoidance measure. More attention needs to be paid in this regard when concluding any service agreement between a foreign-invested enterprise and its foreign affiliates.
(c) Customs duties: No longer a prerequisite for administrative review
To facilitate customs declarations and payments, Article 66 of the Tariff Law provides that a company that applies for an administrative review of customs administrative sanction decisions no longer has the obligation to pay customs duties before applying for an administrative review, whereas paying duties was a prerequisite condition under the Tariff Regulation. This provision is aimed at mitigating the cash flow burden of companies that are subject to administrative sanctions.
(d) Extension of clawback period for overpayments
Article 51 of the new Tariff Law provides that an individual or organisation that overpays customs duties can apply for a refund, as long as the application is made within three years of the payment, whereas under the Tariff Regulation, the period is limited to one year. This modification is intended to correspond with the Taxation Administrative Law, which also provides a three-year period for tax adjustment.
The new provision seems likely to open the door to requests for customs duty adjustment due to the corporate income tax transfer pricing adjustment under the transactional net margin method (TNMM) method.[14] The short period of time offered by the Tariff Regulation in the past made it almost impossible to apply for such a transfer pricing adjustment with customs departments because corporate income tax transfer pricing adjustment often occurs relatively late in the year, or even much later, leaving insufficient time for the Chinese entity to make such a request to customs. The three-year retroactive adjustment makes such an adjustment possible from a technical perspective.
Customs adjustment is extremely important to foreign companies, especially in the luxury goods industry, as it avoids the issue of double taxation by the tax authorities of different countries.
However, other than the general provisions for such retroactive adjustment, the new Tariff Law does not explicitly introduce any provision regarding the customs duty adjustment due to corporate income tax transfer pricing adjustment. Also, the new Tariff Law does not state if adjustments can be made in the case of any mutual agreement procedure,[15] or advanced pricing arrangement reached between two countries’ tax authorities.
The above new provision still needs to be observed in practice with local customs officers to determine whether such a customs duty adjustment is achievable.
(e) Tax avoidance measures
Article 54 of the Tariff Law provides that in case of any action without reasonable commercial purpose to avoid provisions under Chapters 2 and 3, for the purpose of reducing the customs dutiable amount, the authorities can take tax-avoidance measures to adjust the customs duty.
This provision is very similar to the provision of the general tax avoidance measures under Article 47 of the Corporate Income Tax Law. Also, Article 54 states that the authorities can take such measures, which implies that the legal right to take tax-avoidance measures is not limited to customs departments.
The tax-avoidance clause is vague and gives considerable leeway to customs departments to make customs duty adjustments. Also, the Tariff Law provides a period of three years for customs departments to confirm the customs dutiable value. In practice, companies may find it difficult to locate all the relevant documentation from previous years. It is recommended that relevant documents be prepared beforehand to prove the commercial nature of the arrangement.
(f) Enhancement of administrative power
The Tariff Law increases the power of customs departments to take administrative measures and to secure payment of customs duties. This expansion of power seems to be in line with the Chinese Government’s desire to implement more stringent tax collection measures.
Among the measures, the following needs to be taken into account:
a. Measures to restrict legal representatives from leaving China
The Tariff Law empowers customs departments to ask the immigration authorities to prevent those responsible for paying customs duties or their legal representatives from exiting China if customs duties and any related penalties are not paid and no deposit guarantee has been provided. In practice, it is highly likely that the scope of payment can be extended to administrative penalties.
This provision, which previously only existed in the tax regulations, has now been extended to customs regulations, demonstrating a new diligence when it comes to collecting customs duties.
It is recommended to take this legal risk into account when appointing a company’s legal representative. For example, some companies may choose to appoint a legal representative that resides abroad to help mitigate legal risks to the individual.
b. Right to directly order payment of outstanding customs duties from banks
Article 50 of the new Tariff Law empowers customs departments to directly order the payment of duties from an individual’s or organisation’s bank account. Although such measures are already stipulated in the Tentative Measures Regarding the Customs Tax Preservation and Enforcement Measures published in 2009,[16] the Tariff Law again emphasises this measure to secure customs duty payments. In addition, the scope of the parties on which customs duties can be levied has been enlarged to include withholding agents. As withholding agents are mainly related to CBEC, the Tariff Law is designed to secure the payment of customs duties by consumers who purchase goods abroad through the CBEC business model.
(g) Tariff-related measures
The new Tariff Law also clearly stipulates that tariff-related measures, such as anti-dumping customs duties[17] and anti-subsidy customs duties, will continue to be subject to the current regulations. Also, in addition to penalty customs duties,[18] the Tariff Law introduces a new provision that if any country or region refuses to offer most-favoured-nation treatment or customs preferential treatment clauses under an international treaty or protocol concluded with China—or for which China is a contracting party—China can take reciprocal measures following approval by the State Council.
3. Suggestions
Foreign-invested enterprises should check with their local customs agents, logistic providers and professional legal advisors to see whether the customs tariff nomenclature has changed due to the new Tariff Law, and what the impact is on customs duty procedures and related matters. It is vital that all relevant documentation is prepared beforehand, especially any paperwork related to tax avoidance, otherwise considerable work may be required to prove that all service transactions had a reasonable commercial purpose.
Nicolas Zhu is a Partner at CMS China. He has spent more than two decades working extensively for mainly European clients in the areas of luxury brands, consumer goods, life sciences and healthcare. He is one of the main authors of two editions of the book Chine juridique et fiscal (“China Law and Tax”).
Ranked as a Top 10 Global Law Firm, CMS
provides a full range of legal and tax services in over 40 countries, with more
than 80 offices and 6,300 CMS lawyers worldwide. CMS China (Shanghai, Beijing
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[1]Tariff Law, National People’s Congress, 26th April 2024, viewed 19th November 2024, <http://www.npc.gov.cn/c2/c30834/202404/t20240426_436843.html>
[2] Announcement Regarding the Promulgation of the Import and Export Customs Tariff Attached to the Tariff Law, State Council, 26th April 2024, viewed 19th November 2024, <https://www.gov.cn/zhengce/zhengceku/202404/content_6947938.htm>
[3] Imported and Exported Goods Taxation Administrative Measures, General Administration of Customs, 28th October 2024, viewed 19th November 2024, <http://www.customs.gov.cn/customs/302249/302266/302267/6176833/index.html>
[4] Decision No. 273 on the Modification of Certain Regulations of the General Administration of Customs, General Administration of Customs, 28th October 2024, viewed 19th November 2024,<http://www.customs.gov.cn/customs/302249/2480148/6176885/index.html>
[5] Import and Export Customs Tariff Regulation, State Council, 23rd November 2003, viewed 19th November 2024, <https://www.gov.cn/gongbao/content/2017/content_5219152.htm>
[6] Customs Law, National People’s Congress, 22nd January 1987, viewed 19th November 2024, <https://www.gov.cn/banshi/2005-08/31/content_27749.htm>
[7] Taxation Administration Law, National People’s Congress, 4th September 1992, viewed 19th November 2024, <http://www.npc.gov.cn/npc/c1772/c21116/c21297/c21305/201905/t20190521_180282.html>
[8] Decision of the National People’s Congress on Amending the Legislation Law, National People’s Congress, 15th March 2015, viewed 19th November 2024, <http://www.npc.gov.cn/zgrdw/npc/xinwen/2015-03/18/content_1930129.htm>
[9] Administrative Enforcement Law, National People’s Congress, 30th June 2011, viewed 19th November 2024, <https://www.gov.cn/flfg/2011-07/01/content_1897308.htm>
[10] Customs Administrative Sanction Administrative Regulation, General Administration of Customs, 19th September 2004, viewed 19th November 2024, <http://www.customs.gov.cn/customs/302249/302266/302267/356578/index.html>
[11] Circular related to the Improvement of Import Supervision on Cross-border E-commerce Retail, 28th November 2018, viewed 19th November 2024, <https://www.gov.cn/zhengce/zhengceku/2018-12/31/content_5437823.htm>
[12] According to Article 26 of the Tariff Law, the following expenses listed in the price of goods at the time of importation shall not be included in the customs dutiable value: expenses related to the construction, installation, assembly, repair and technical services after the importation of the plant, machinery and equipment, other than warranty repair service fees. This means that the customs dutiable value will now include warranty repair service fees.
[13] Examples of services that might be included in the customs dutiable value include fees for various services, such as consultation and design.
[14] The TNMM method compares the net profit margin relative to an appropriate base, such as costs or sales.
[15] It is possible to use a mutual agreement procedure in China, according to an announcement by the State Administration of Taxation. See: Announcement on the Issuance of the Administrative Measures for the Adjustment of Special Tax Investigation and Mutual Agreement Procedures, State Administration of Taxation, 17th March 2017, viewed 19th November 2024, <https://www.chinatax.gov.cn/chinatax/n810341/n810765/n2511651/201703/c2712540/content.html>
[16] Tentative Measures for Customs Tax Preservation and Enforcement Measures, General Administration of Customs, 1st September 2009, viewed 19th November 2024, <https://www.gov.cn/flfg/2009-08/24/content_1399595.htm>
[17] On 11th November 2024, the Ministry of Commerce announced a temporary anti-dumping tax on imports of brandy of EU origin. The tax applies to containers holding less than 200 litres, however, any attempt to import in containers holding more than 200 litres and bottling the product in China may trigger the tax-avoidance provision of the Tariff Law. See: Notice No. 50 [2024] of the Ministry of Commerce on the Implementation of Provisional Anti-Dumping Measures on Imported Cognac Originating from the European Union, Ministry of Commerce, 11th November 2024, viewed 26th November 2024, <http://www.cacs.mofcom.gov.cn/article/ajycs/jkdc/202411/182414.html>
[18] Penalty customs duties refers to penalty customs tariffs levied by China in case any state or region violates an international treaty or protocol concluded with China or for which China is a party, and imposes prohibitions, restrictive trade measures or increases customs tariffs or other customs measures which may impact normal trade.
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