Tag:tax,compliance and regulatory-customs and trade compliance
(This article was originally published by ALM on 21 June 2024)
On April 26, 2024, the Standing Committee of the National People's Congress (NPCSC) of China voted to adopt the PRC Customs Tariff Law (the “Tariff Law”) (中华人民共和国关税法), which is scheduled to take effect on December 1, 2024. This has become one of the year’s focal legislative events in China. Following enactment of the Tariff Law, China has implemented legislation for 13 out of the country's 18 existing tax categories. From a tax perspective, this law achieves alignment with other tax laws and regulations, and encompasses several noteworthy highlights.
New Progress in Following the Principle of Statutory Taxation
Before the promulgation of the Tariff Law, China administered and collected tariffs in accordance with the PRC Import and Export Tariff Regulations (the “PRC IET Regulations”) (中华人民共和国进出口关税条例). Transitioning from regulations to law, this legislation upholds the fundamental stability of the existing tariff system, while maintaining an overall unchanged tax burden. The new law creates a more rigorous and logical system, structuring the legal framework according to different tax elements, including tax rates, taxable amounts, tax incentives, etc.
The principle of statutory taxation requires that the tax elements of taxation should be clearly defined by law, and the Tariff Law fully adheres to this principle. Taking tax rates as an example, Article 15 of the Tariff Law has made new provisions for authorized agencies to adjust tariff rates. Under the previous PRC IET Regulations, the Tariff Commission was responsible for this task. The Tariff Law transfers the decision-making power for tariff rates to the State Council in general, with specific cases requiring filing with the NPCSC. The Tariff Commission will concentrate on making recommendations and issuing commentary on the tax rates.
Updates to Tariff Rules for Cross-border E-commerce Retail Imports
For cross-border e-commerce (“CBEC”) retail import business, it is clear that the tariff taxpayers are the consumers. In practice, however, according to the B2C model, it is not feasible and efficient to directly levy tax on numerous individual consumers. Taking into account this real-life obstacle, the adoption of withholding methods and clarity of withholding agents are key to securing the tax base.
The Tariff Law clarifies who shall be the obligated withholding agents, and their responsibilities. For CBEC retail import businesses, the withholding agents of tariffs include e-commerce platform operators, logistics firms, customs declaration agencies, and individuals or entities mandated by law to withhold tariffs.
The regulation of withholding agents is not entirely new: the Notice on Work Relating to Improved Regulation of Cross-border E-commerce Retail Importation (Shang Cai Fa [2018] No. 486) (关于完善跨境电子商务零售进口监管有关工作的通知) has preliminarily stipulated the obligated withholding agents. Specifically, Article 3.4.1 of that Notice states, “Consumers are the taxpayer of CBEC retail import tax. The CBEC platform, logistics enterprise or Customs declaration enterprise shall act as withholding agent to provide tax guarantee to the Customs, and bear the corresponding obligation to pay overdue tax and the relevant legal liability.”
However, under the Tariff Law, the withholding obligation is stipulated and regulated by law; in the meantime, the law also clarifies the legal liability and consequences where the withholding agents fail to fulfill their obligations.
Article 64 of the Tariff Law stipulates that if a withholding agent fails to withhold or collect an amount of tax which should have been withheld or collected, the Customs (the authority responsible for collecting tariffs in China) shall seek the payment of the tax from the taxpayer and impose on the withholding agent a fine of not less than 50% and not more than three-times the amount of the tax which should have been withheld or collected. This provision has achieved convergence with the PRC Tax Collection Administration Law (“TCAL”) (中华人民共和国税收征收管理法).
Introduction of Tax Priority and Anti-Avoidance Measures
Article 58 of the Tariff Law brings in the tax priority rules from the TCAL, making it clear that the taxes collected by Customs take precedence over unsecured claims and secured claims that occur after the taxes, and also over penalties and illegal gains. However, when it comes to the special scenario of bankruptcy, taking into account the principle of superiority of law, it is understood that the bankruptcy law, as a specialized law, should take precedence over the Tariff Law in cases of conflict.
Article 54 of the Tariff Law introduces anti-avoidance measures. In cases where actions lack reasonable commercial purposes and result in a reduction of tax payable, the state can intervene with anti-avoidance measures, such as adjusting the tariffs. These measures will not only apply to regular tariffs but also encompass special tariff actions such as anti-dumping, anti-subsidy and retaliatory tariffs. Compared to other kinds of tax-avoidance tactics, this covers a broader range of applications. However, it is yet to be clarified how procedures for the anti-avoidance measures outlined in the Tariff Law will be initiated and carried out.
From a tax perspective, the TCAL stipulates one tax anti-avoidance measure, i.e. that the tax authorities have the power to assess the tax amount payable where the basis for assessing tax declared by the taxpayer is obviously on the low side and without justified reasons (Article 35 of the TCAL states, “If a taxpayer comes under one of the following circumstances, the taxation authorities have the power to assess the tax amount payable: ... (6) where the basis for assessing tax declared by the taxpayer is obviously on the low side and without justified reasons.”). The specific procedures and measures for the tax authorities to assess the tax amount will be formulated by the State Taxation Administration. In practice, various methods for assessing tax are adopted, such as (i) taking account of the tax burden of taxpayers in similar industries or in industries with similar business scale and income volume in the local area in order to assess tax; and (ii) determining the taxable income based on cost plus reasonable profit mark-up, etc.
It is reasonable to take the view that appropriately referencing the measures taken by the tax authority in practice is an effective way for Customs to mature its anti-avoidance measures. It is anticipated that, in the near future, Customs may issue implementation regulations on this matter.
Tariff Reconsideration Process Does Not Require Pre-Tax Clearance
According to Article 66 of the Tariff Law, taxpayers, withholding agents, and guarantors facing disputes over tax issues such as tariff taxpayer identification, goods origin, taxable value and applicable tax rates must first seek administrative reconsideration from higher-level customs authority. If they disagree with the reconsideration decision, they retain the right to initiate an administrative lawsuit through the proper channels of the People's Court. The Tariff Law makes it clear that there is no need to prepay taxes to initiate the reconsideration process for tariff disputes. This significantly reduces the cost of seeking legal remedies for taxpayers.
Under the current TCAL, tax disputes similarly require administrative reconsideration before litigation can be initiated. Before applying for reconsideration, taxpayers, withholding agents or tax payment guarantors must pay or remit the amount of tax and late payment interest or provide an adequate guarantee in accordance with the decisions made by the tax authorities. The high entry threshold for applying reconsideration makes this method practically ineffective in some cases. The shift in tariff dispute resolution rules by the Tariff Law is likely to influence future amendments to the TCAL; the taxpayers will be benefited from removing the above prerequisite of applying reconsideration.
In China, Customs is bound by the PRC Customs Law (中华人民共和国海关法), in which Chapter V grants the right for the Customs to collect tariff. It is worth noting that the existing PRC Customs Law mandates that tax must be paid upfront before tax-related administrative reconsideration can be initiated. This discrepancy between the PRC Customs Law and the Tariff Law could result in disputes over various tax types arising from the same issue: the import price of goods is considerably low, for example.
The "Tax Confirmation" Mechanism under the New Regulatory Model
Article 41 of the Tariff Law specifies that the management of tariff collection will embrace a more flexible approach, allowing for a distinct process where goods can be released and the tax amount determined separately, to accommodate the evolving requirements of new forms of foreign trade. Under this model, clearing goods through customs does not signify confirmation of the taxpayer's tax declaration content. Consequently, the Tariff Law has introduced a new mechanism to confirm the amount of tariff.
Under this mechanism, Article 45 further stipulates that Customs is empowered to confirm the corresponding tax amount within three years from the date of payment by taxpayers, withholding agents, or from the time goods are released. If the tax amount verified by Customs differs from the declared amount by the taxpayer or withholding agent, Customs will issue a tax confirmation letter to them. Taxpayers and withholding agents must settle the overdue tax or initiate tax refund procedures within the timeframe set by Customs, based on the tax amount stated in the tax confirmation letter.
This mechanism aligns with the commercial demands of cross-border trading, and undoubtedly puts higher requirements on the tariff compliance management of taxpayers and withholding agents, extending the management cycle to three years. Meanwhile, the introduction of the tax confirmation letter, as a newly defined formal tariff document in the Tariff Law, serves to regulate tariff collection and enhance customs enforcement transparency.
Adjustment of Tax Supplementation and Refund Periods
The Tariff Law aligns the adjustment of tax supplementation and refund periods with the TCAL. Under previous PRC IET Regulations, after the release of goods, if the customs discovered underpaid or unpaid taxes which were not due to the taxpayer's violation of regulations, the taxpayer would be required to make up the tax shortfall within one year from the date of payment or release without incurring late payment interest. If the underpaid or unpaid taxes were caused by the taxpayer's violation of regulations, the collection period would be extended to three years, and a daily late payment interest of 0.05% of the underpaid or unpaid taxes amount would be imposed.
The introduction of the tax confirmation mechanism allows Customs to verify whether taxpayers need to make supplementary tax payments within three years, so the Tariff Law has adjusted the deadline for tax recovery and supplementation, unifying both to three years. Whether the underpaid or unpaid taxes are due to a violation of regulations now only affects the starting point for when late payment interest is calculated.
It is important to highlight that Customs is not bound by the previously mentioned collection period when collecting tariffs and late payment interest linked to smuggling activities, and retains the authority to approve the amount of tax payable. This additional clause of the Tariff Law aligns with the PRC Criminal Law (中华人民共和国刑法), showing China's determination to tackle smuggling offenses.
With respect to tax refunds, with the implementation of the tax confirmation mechanism, taxpayers now have three years to identify an overpayment of taxes and submit a refund request to Customs. To secure a refund, taxpayers must submit a written request, undergo customs review, and fulfill the necessary refund procedures. This extension of the refund period from one year, as stipulated in the PRC IET Regulations, to three years under the Tariff Law, is viewed as a measure to strike a balance of interests between taxpayers and Customs amid the extended tax supplementation period.
Introducing Legal Liability Provisions
New legal liability provisions have been incorporated into the Tariff Law. According to Article 62, in cases of mergers, divisions, or bankruptcies where reporting obligations to Customs are not met, a warning will be issued by the customs. In more severe instances, a fine of up to CNY 30,000 may be imposed. Enterprises undergoing restructuring must take note of these provisions.
According to Article 63 of the Tariff Law, if a defaulting taxpayer employs the means of transferring or concealing property to obstruct the customs authorities in seeking unpaid taxes, they could face penalties ranging from 50% to five-times the amount of the unpaid taxes, in addition to the unpaid taxes and late payment interest charges imposed by Customs. This provision aligns with Article 65 of the TCAL, fostering integration with the collection and administration frameworks for other taxes collected by the tax authorities and tariff collected by the customs.
Moreover, the Tariff Law also reflects a system of joint punitive measures for significant tax violations. Under this system, taxpayers who violate tax laws will be subject to comprehensive constraints imposed by various government departments, including export restrictions, bans on certain luxury expenditures, and barriers to market entry and so on.
Article 49 of the Tariff Law explicitly outlines that, aside from publicizing tax arrears, if taxpayers default on their taxes and late payment interests, and fail to provide the necessary guarantees to Customs, with the approval of the director of the customs authorities, Customs can notify the immigration authorities to take lawful measures to restrict taxpayers or their legal representatives from exiting the country.
The promulgation of the Tariff Law not only reflects the principle of statutory taxation, but also establishes new guidelines that align with the dynamic cross-border trade environment for tariff collection and administration. It is recommended that taxpayers should carefully review these regulations and enhance their tariff compliance strategies in order to reduce tax risks.
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