Navigating China’s Customs - Balancing Risk &...

Navigating China’sCustoms - Balancing Risk& Opportunity

Footwear TrafficDistribution Conference

www.pwc.com

Footwear TrafficDistribution Conference

October 22, 2013

Introductions and Contacts

ChinaU.S.

PwCPwC

Damon PalingPartner, China

Tel: 86 21 2323 2877

[email protected]

Anthony TennarielloPartner, New York

Tel: 646 471 4087

[email protected]

Overview of Key Messages

China is no longer cheapand the government isworried. Governmentwishes to promote exports

China Exports• Rising costs• Government help 1

Review sourcing model,US Imports

PwC

Review sourcing model,save duties through firstsale for export and foreigntrade zones

US Imports• Duties still at 6% - 37.5+%• Some FTA inclusions 2

Evolving world driven byboth consumer trends aswell as governmentregulatory reform.

Other Discussions• E-Commerce• Free Trade Agreements• Accessing China

3Slide 3

Part One – China Exports

1. Shifting Sourcing Strategies

2. Drivers for Sourcing Diversification

3. Chinese Export Environment

4. Chinese Government Assistance for Exporters

PwC

1. Shifting sourcing strategies

1) Global sourcing is dynamic andgrowing

2) Cost is still the key driver of globalsourcing, but not the key focus

3) Many companies do not have an29%

37%

37%

73%Reduced product / rawmaterial cost

Flexibility inproduction / supply

Competitive response

Expand current offers

Reasons for global sourcing Current trends in global sourcing

PwCPwC

3) Many companies do not have aneffective procedure to measure andtrack actual savings

4) As companies look to the future,product quality is tapped as theirhighest priority

10%

5%

5%

22%

20%

22%

29%Expand current offers

Improved quality

Replace dwindlinglocal supply

Improveresponsiveness

Social / political /ethical reasons

Better Standards

Other

Source: PwC’s Global Sourcing: Shifting Strategies, A Survey of Retail & Consumer Companies

5

2. Drivers for sourcing diversification

• Manufacturers will continue to find the cheapest and most efficient way to sourceproduct for the end-consumer.

• Today, China is one option widely used for manufacturing. However, with the risingcost of living in China and the appreciating RMB, the next manufacturing hubs may bein other less expensive economies in Asia or Africa.

• Key drivers for sourcing diversification will be:

PwCPwC

o The continued development of technology and the frictionless nature of dataexchange via the internet will drive companies to emerging countries as potentialmarkets for outsourcing services.

o Transportation-related costs will be a deciding factor for procurementlocation. In some instances, manufacturers will move manufacturing bases back tothe US where the benefit of short transportation and lead times will outweigh theincreased costs.

o Shopper preferences may play a significant role in where goods are procured–these preferences may be based on product-safety-related issues.

6

3. How is the export environment in China?

• Total export volume increased by 7.9% in 2012 (USD 2 trillion)

• Export is encouraged

• Less scrutiny by Customs

• Export VAT refund rate has been adjusted upward

PwCPwC

• Export VAT refund rate has been adjusted upward

• Export duties are reducing

• Export quota still exists

• More trade facilitation programs are offered to exporters

• CIQ Certificate B on exports

7

4. What has China done to help its exporters?Positive impact on your sourcing cost…

• China Customs introduced a series of trade facilitation programs andimprovement plans in September 2012 for the purpose of stabilization andpromotion of the international trade (GAC Announcement [2012] No. 45).

• To enhance the export volumes, Customs at the main exporting provincesoffer preferential treatments to exporters.

• For example, Guangzhou Customs introduced 15 preferential treatments for

PwCPwC

• For example, Guangzhou Customs introduced 15 preferential treatments forachieving expedite customs clearance and simplified operational proceduresfor exporters under Processing Trade Regime.

• In addition, to save the operational costs for exporters, State Council alsointroduced several policy to promote the steady increase in internationaltrade. For example, for the 4th quarter of 2012, the CIQ inspection andquarantine fees were waived.

8

4. What has China started doing to help itsexporters? Continued…

• Since 1 January 2013, CIQ inspection and quarantine fee payment has been simplifiedwith reduced single charge

o Charges have been merged into one, named "Charge for Goods Inspection andQuarantine", which avoids double charge.

o The charge rate has been reduced from 0.15% and 0.12% of the total goods value to0.08%.

PwCPwC

0.08%.

• Since 15 August 2013, 1,507 HS codes of “General Manufactured Goods” have beenexempted from CIQ export inspection, where 1,420 HS codes (including most of theapparel and footwear products) therein have been removed from the “List of exportedgoods which are subject to compulsory inspection and testing”.

• Other developments announced during the Executive Meeting of State Council on 24July 2013, including:

o Develop short-term export credit insurance business;

o Encourage foreign trade service companies to provide supports for export-orientedprivate companies in respect of financing, Customs clearance, tax refund, etc.

9

Part Two – US Imports

1. The Typical Sourcing Models

2. First Sale For Export (FSFE)

Overview

Transaction Structure

PwC

Example

Legal Requirements

Benefits

Practical Considerations

3. Foreign Trade Zones

1. The typical sourcing models?A simple illustration…

Tradition Models Emerging Models

US Buyer US Buyer

“IPO”

PwCPwC 11

ChinaManufacturer

A

ChinaManufacturer

B

ChinaManufacturer

C

ConsolidationHub

ChinaManufacturer

A

ChinaManufacturer

B

ChinaManufacturer

C

“IPO”

“RDC”

2. First Sale for Export – Overview

What is a First Sale for Export?

• When there are multi-tiered salestransactions giving rise to theimportation of merchandise to theU.S., the transaction value in an

Where can First Salefor Export be used?

• FSFE valuation methodis currently accepted bycustoms authorities in

PwCPwC

U.S., the transaction value in anearlier sale transaction may be usedas the basis for appraisement,provided that certain requirementsare satisfied

customs authorities inthe U.S. and the EU.Most other jurisdictionsdo not accept FSFEvaluation

12

2. First Sale for Export - Transaction Structure

Importer

Orders placed

Import Sale Transaction –Duties typically based off thisvalue

Middleman InvoicesImporter

PwCPwC 13

Middleman Vendor

Manufacturer(s)

Finished Goods ShippedDirectly to Importer

Orders placed

First Sale Transaction –Duties based off this valueunder FSFE valuation

ManufacturerInvoices Middleman

2. First Sale for Export - Example

• FSFE reduces an importer’s duty liability by applying the duty rate tothe first sale value, which is presumably lower than the import sale

Import SaleValuation

Second Sale $100

First SaleValuation

Second Sale $70

PwCPwC 14

Second Sale $100

Duty Rate 15%

CustomsDuties

$15

Second Sale $70

Duty Rate 15%

CustomsDuties

$10.50

Customs Duty Savings: $ 4.50 (30%)

2. First Sale for Export - Basic Legal Requirements

• The first sale must be a bona fide sale, and the use of transactionvalue must not otherwise be precluded pursuant to the valuation law

Sale for Export

Arm’s Length Transaction

PwCPwC

• The transaction between the manufacturer and the middlemanmust be conducted at an “arm’s length,” free from any non-marketinfluences

• The merchandise must be clearly destined for export to the U.S. orEU at the time of first sale

Arm’s Length Transaction

Clearly Destined

15

2. First Sale for Export - Benefits

First sale forexport may reduceduty expenses and

First sale forexport may becombined with

FSFE valuationcan be usedregardless of

Key Benefit Key BenefitKey Benefit

Suppliers whoseoperatingstructure supports

Key Benefit

PwCPwC

duty expenses andhelp manage thelanded cost ofimportedmerchandise

combined withother duty savingsprograms tomaximize benefits(e.g., FTAs withregional valuethresholds)

regardless ofwhere theunderlyingimported productoriginatesimporters

16

structure supportsFSFE areconsidered morevaluable businesspartners by US/EUimporters

2. First Sale for Export - Practical Considerations

• FSFE can be used in unrelated supply chain models as well as in verticallyintegrated supply chain

› Supply chains involving related parties will require periodic analysisof FSFE prices to ensure the manufacturer’s price meets the arm’slength standard

• Ongoing commitment to maintaining compliance with FSFE criteria

PwCPwC

• Ongoing commitment to maintaining compliance with FSFE criteria

◦ FSFE valuation risks and liabilities are those of the importer, not the foreign supplier

◦ U.S. Customs can require substantiation of the FSFE price at any time, with an expectation that importers can provide that data within 30 days

• FSFE affords customer visibility to manufacturing level costing

• Restructuring for FSFE requires coordination between all parties in thesupply chain to ensure that all considerations are addressed

17

3. Foreign Trade Zones

• Foreign-Trade Zones (“FTZ”) are specially designated secured accessareas that are deemed outside the “Customs territory of the UnitedStates” for purposes of customs duty.

• Benefits of FTZs:

- Time value of money/carrying costs

- Weekly administrative benefit (single weekly entry transaction and

PwCPwC

- Weekly administrative benefit (single weekly entry transaction andmerchandise processing fee cap)

- Duty avoidance on exports

- Inventory tax exemption

- Inverted tariff

- More efficient delivery times

- Zone-to-zone transfers

- Defects/damage/obsolescence/waste/scrap

18

Receipts

ImportedItem #1AthleticShoes

@ 20%

Imported

Shipments

Shipments toCanada/Mexico/Etc.

“In – Bond”Duty

Deferred

No Duty inU.S.

Shipments for

U.S. ForeignTrade Zone

3. Foreign Trade Zones - Distribution Example

PwC

ImportedItem #2

Casual Shoe@ 9%

FTZ Benefits

Shipments forExport from the U.S.

No Duty Due

Duty Avoidanceon Exports

Cash FlowDeferral on

Duty Payments

Administrative Benefits:Weekly entry limits MPF(.3464%) to $485 per week

Time Value ofMoney –Carrying

Costs

Trade Zone

Other Discussions

1. E-commerce

2. Utilization of Free Trade Agreements

3. Accessing China: Case Study

PwC Slide 20

1. Customs Considerations of E-Commerce

Why should I care about customs?

• E-commerce sales that result in shipments across borders will triggercustoms implications in the country of importation. The customs proceduresoften vary widely by country, and the cost of compliance can be significant.

What should I be thinking about as it relates to customs?

PwCPwC

• Consider proactively managing the entire customs process, paying specialattention to import requirements, customs valuations, non-tariff restrictions,tariff exemptions, returned merchandise, and inventory planning.

What are the benefits of proactively managing the customs process?

• Proactively managing the entire customs process can help companies avoiddisruptions and delays related to the delivery of goods, ensure compliancewith local country requirements, and reduce overall costs associated with e-commerce transactions.

21


The Physical Challenges to Virtual Sales

• E-commerce sales that result shipments across borders will triggercustoms implications in the country of importation

› Customs procedures vary widely by country

› Non-compliance with local customs requirements can often

PwCPwC

› Non-compliance with local customs requirements can oftenresult in delays and/or disruptions to the delivery of theunderlying shipments

› Cross-border movement s can add substantial cost to e-commerce transactions (e.g., customs duty and other taxes,import fees depending on jurisdiction)

• Proactive consideration and management of customs implications iskey to successful global e-commerce operations


• Import Requirements & Procedures– Consideration must be given tolocal import procedures and who can act as the Importer or Recordin the local country. Procedures and requirements vary byjurisdiction.

• Tariff classification - Required extended to the 8 or 10 digit level atthe point of importation and generally vary substantially between

PwCPwC

the point of importation and generally vary substantially betweencountries

› Achieving dynamic tariff classification and tariff ratecalculation ability in website interface is key to generation ofproper commercial documentation to accompany theshipments

• Customs Value- Will generally be based on customer retail sales priceat time at point of importation; higher retail values will result inhigher duty assessments.


• Non-Tariff Restrictions – Consideration must be given to localproduct-specific restrictions, import license requirements (e.g.,Convention on International Trade Endangered Species, Food &Drug administration authorities, Country of Origin Marking, ProductSizing and Labeling Language requirements)

• Tariff exemptions for non-commercial shipments -

PwCPwC

• Tariff exemptions for non-commercial shipments -Exemptions from duty on non-commercial shipments vary byjurisdictions. Opportunity to apply these conventions to minimizeimport duties should be explored.

• Bonded warehouse facilities – Consideration should be given tothe potential use of bonded facilities to maintain inventory (andreturns) in a “import suspended” environment to minimize customsduty costs


• Processing Returns – Consideration must be given to theprocessing of returns as, without proper planning, the returnedmerchandise will generally trigger unrecoverable import dutyexpense upon re-importation.

• Inventory planning – Consideration should be given to inventoryplanning to help minimize customs related costs.

PwCPwC

planning to help minimize customs related costs.

- Where should inventory be maintained?

- Should a bonded facility be used to manage inventory andreturned merchandise in an ‘import suspended’ environment?

2. Utilization of FTA - examples

PwCPwC 26

2. Utilization of FTA - Duty Reduction Schedule forAJCEP Section 1 Notes for Schedule of Vietnam

PwCPwC 27

• All articles of HS Ch 64 are either B10 or B15 category in the legal notes.

• B10 items will have duty rates eliminated in 11 equal annual installments from the baserate to free. B15 items will have duty rates eliminated in 16 equal annual installments fromthe base rate to free.

• Currently, there is not major duty relief to be realized under the AJCEP for Ch 64 itemsoriginating in Vietnam. However, starting from 2018 many items will be duty exempt.

2. Utilization of FTA - What does the factory needto do to achieve FTA compliance?

1. Review the FTA legal text as a good starting point

2. Cost-benefit analysis – Is it worthwhile to utilise the FTA?

3. Review and understand the Rules of Origin for every product that you are manufacturing

4. Apply the Rules of Origin, working with different departments as necessary (sourcing,engineering, R&D, etc.)

5. Work with different departments internally to get the documentation in place

PwCPwC

5. Work with different departments internally to get the documentation in place

6. Ensure approvals from government authorities – can exist inconsistencies in application ofprocedures in different countries

7. Review supply chain related issues – Accumulation, 3rd party commercial invoicing andconsolidation in intermediate location, etc.

8. Prepare defence documentation for post-verification checks by customs authorities in importingcountries

9. Keep up-to-date with future opportunities (i.e. China, S. Korea, Japan FTA negotiations startingin Summer 2012).

2. Utilization of FTA - Direct Consignment Clause

ACFTA (Vietnam to China) AJCEP (Vietnam to Japan)

Rule 8: Direct Consignment

The following shall be considered as consigned directlyfrom the exporting Party to the importing Party:

(a) If the products are transported passing through theterritory of any other ACFTA Member States;

(b) If the products are transported without passingthrough the territory of any non-ACFTA MemberStates;

Article 31: Direct Consignment

1. Preferential tariff treatment shall be accorded to anoriginating good satisfying the requirements of thisChapter and which is consigned directly from theexporting Party to the importing Party.

2. The following shall be considered as consigned directlyfrom the exporting Party to the importing Party:

PwCPwC

States;(c) The products whose transport involves transit

through one or more intermediate non-ACFTAMember States with or without transhipment ortemporary storage in such countries, provided that:

(i) the transit entry is justified for geographical reasonor by consideration related exclusively to transportrequirements;

(ii) the products have not entered into trade orconsumption there; and

(iii) the products have not undergone any operationthere other than unloading and reloading or anyoperation required to keep them in good condition.

(a) a good transported directly from the exporting Party tothe importing Party; or

(b) a good transported through one or more Parties, otherthan the exporting Party and the importing Party, orthrough a non-Party, provided that the good does notundergo operations other than transit or temporarystorage in warehouses, unloading, reloading, and anyother operation to preserve it in good condition.

29

3. Accessing China: Case StudyCurrent Model

China made shoes Non-China made shoes

China marketsales

• 2% VAT leakage cost on shoesexported from China to HK DC

• Certificate B required for shoesexported from China to HK DC

• 17% average CD on shoes re-imported into China from HK DC

• Increased logistics costs due to

• Missed opportunity on FTA (e.g. ACFTAfor Vietnam originating shoes) due tothe HK DC and the “picking”arrangement

• Increased logistics costs by using HK DCrather than shipping direct to China?

PwCPwC Slide 30

• Increased logistics costs due to“round-tripping” via HK DC

• Increased lead time due to “round-tripping” via HK DC

Non-Chinamarket sales

• Missed opportunity on FTA . Forexample, use APTA for sales toKorea to reduce 17% CD to average12% CD

• Increased logistics costs by usingHK DC rather than shipping directto the end market?

• Missed opportunity on FTA (e.g. ASEAN– Korea and ASEAN – Japan) due to theHK DC and the “picking” arrangement

• Increased logistics costs by using HK DCrather than shipping direct to the endmarket?

Countries

1

3

NE AsiaSE AsiaChinaAU / NZSouth AsiaMiddle East

4

Description

1 & 2.Vietnam and Chinafactories deliver FG to HK DC.

3. Factories invoice HQ in US forFG.

4. FG shipped by sea to 9countries from HK.

United States Headquarters (HQ)

6

3. Accessing China: Case StudyCurrent Model

PwCPwC

ASEAN(Vietnam)factories

China factories

HONG KONGWAREHOUSE

2

Middle East countries from HK.

5. FG trucked by road to China.

6. HQ in US invoices subsidiariesor third parties in importingcountry for FG.

* In China market, the USsubsidiary operating as an LRDis responsible for sales anddistribution

Invoice Flow

Goods Flow

5

31

3. Accessing China: Case StudyNew Model

China made shoes Non-China made shoes

Chinamarketsales

• Eliminate 2% VAT leakage• Eliminate 17% CD• Some residual CD on import RM still apotential cost (to be confirmed)• Reduced logistics costs due to no more“round-tripping” via HK DC• Reduced lead time due to no more “round-

FTA sourcing country (e.g. Vietnam)• Reduce CD to 0% wherever possible byshipping direct to China and ensuring Factoryobtains a Certificate of Origin, but still invoicevia HQ (or invoice direct subject to Taxconsiderations).• Most HS Codes enjoy a 0% CD today; that

PwCPwC Slide 32

sales• Reduced lead time due to no more “round-tripping” via HK DC

• Most HS Codes enjoy a 0% CD today; thatwill be expanded to all HS Codes by 1 January2016 per the ACFTA tariff reductions.Non-FTA sourcing country (e.g. Spain)• Continue to use HK DC or ship direct,depending on the best logistics solution

Non-Chinamarketsales

FTA partner country (e.g. Korea)• Reduce CD to lower than MFN by shippingdirect to markets like Korea, but still invoicevia HQ where possible (otherwise invoicedirect)Non-FTA sourcing country• Continue to use HK DC or ship direct,depending on best logistics solution• Continue to invoice via HQ

FTA sourcing country (e.g. Vietnam)• Reduce CD to lower than MFN by shippingdirect to markets like Japan and Korea, butsill invoice via HQ where possible (otherwiseinvoice direct)Non-FTA sourcing country• Continue to use HK DC or ship direct,depending on best logistics solution•Continue to invoice via HQ

3. Accessing China: Case StudyNo round-tripping of Chinese made shoes

Description

1. Factories source RM (e.g. rubberand leather) domestically or fromFTA countries (e.g. Malaysia) andimport duty-paid.

2. Factories manufacture FG in Chinaand ship directly to China non-bonded warehouse.

China or FTA rawmaterials factories

Design fee at X%of domesticpurchases

Service fee for“know-how” inrelation to logisticsat X % of domestic

5


PwCPwC 33

bonded warehouse.

3. Factories invoice FG to Chinasubsidiary in RMB and charge 17%VAT.

4. China subsidiary ship/invoice inRMB with 17% VAT to retail outletsacross China.

5. Introduce new non-dutiable licensefee arrangements between Chinasubsidiary and US HQ to cover“know-how” fee and design feesseparately.

China factories

China RetailOutlets

CHINA NON-Bonded

Warehouse

2

1

3

4US Subsidiaryin China

Invoice FlowGoods Flow

Invoice inRMB with17% VAT

at X % of domesticpurchases

Service Fee Payment Flow

3. Accessing China: Case StudyFTA usage for non-Chinese made shoes, where applicable

Description

1. The invoicing flow would be fromVietnam factories to ChinaSubsidiary via US HQ.

2. Ship non-Chinese made shoesdirect to China non-bondedwarehouse, where an FTA isapplicable (unless Hong Kong

3


PwCPwC 34

applicable (unless Hong Kongauthorities will issue a ‘certificateof no further processing’ inwhich case a HK DC could still beused).

4. China subsidiary willship/invoice in RMB with 17%VAT to retail outlets acrossChina.

ASEAN (Vietnam) factories

China RetailOutlets

CHINA NON-Bonded

Warehouse

2

1

3

4

Invoice inRMB with17% VAT

Invoice Flow

Goods Flow

ChinaSubsidiary

3. Accessing China: Case StudyFTA usage for (Form E) e.g. Vietnam to China

PwCPwC

“MovementCertificate”

“Third PartyInvoicing”

Summary and Q&A

PwC

Summary of Key Messages

China is no longer cheapand the government isworried. Governmentwishes to promote exports

China Exports• Rising costs• Government help 1

Review sourcing model,US Imports

PwC

Review sourcing model,save duties through firstsale for export and foreigntrade zones

US Imports• Duties still at 6% - 37.5+%• Some FTA inclusions 2

Evolving world driven byboth consumer trends aswell as governmentregulatory reform.

Other Discussions• E-Commerce• Free Trade Agreements• Accessing China

3Slide 37

Thank You!

www.pwc.com

Navigating China’s Customs - Balancing Risk &...

Documents

Transcript of Navigating China’s Customs - Balancing Risk &...