Many taxpayers were investigated by the General Administration of Customs of the People’s Republic of China (“the Customs authorities”) on royalty fees for their imported goods. They were fined for supplementary tariffs and value-added taxes (“VAT”) on royalties, as a result of the increased scrutiny by the Customs authorities on royalties for imported goods.
Importers must ensure compliance with the new requirements on their royalty arrangements to avoid penalties from any violation of these requirements. The announcement below clarifies the key requirements for taxpayers.
Summary of relevant regulations：
Since 2016, the Customs authorities has issued a series of bulletins on royalties for imported goods to strengthen the regulations of customs royalties.
| No. |
Bulletins |
Provisions on royalties |
| 1 |
Bulletin [2016] No. 20 “Announcement on Amendment in Customs Declaration Forms for Imported and Exported Goods by the General Administration of Customs of the People’s Republic of China” (hereinafter referred to as “Bulletin 20 in 2016”)
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Included “Confirmation on special relations”, “Confirmation on pricing” and “Confirmation on royalties paid” in “Other supplementary description” sections.
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| 2 |
Bulletin [2017] No. 13 “Announcement on Amendment in Customs Declaration Forms for Imported and Exported Goods by the General Administration of Customs of the People’s Republic of China” (hereinafter referred to as “Bulletin 13 in 2017”)
|
Corresponding adjustments on the requirements for sections "Confirmation of special relationship", "Confirmation of pricing", and "Confirmation of royalty payment related to Goods".
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| 3 |
Bulletin [2019] No.20 “Announcement of the Addition of Customs Supervision Method” (hereinafter referred to as “Bulletin 20 in 2019”)
|
Added the customs supervision method "Subsequent taxation on royalties", code 9500, “declaration of tax to the Customs authorities within the prescribed period after the royalties are paid.” This applies to taxpayers who pay royalties after the goods are imported.
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| 4 |
Bulletin [2019] No.58 “Announcement on Issues concerning Royalty Filing Formalities for Tax Purpose” (herein after referred to as “Bulletin 58 in 2019”)
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Should royalties be paid for the imported goods, either directly or indirectly, to the seller or the relevant party and whether or not royalties have been included in the dutiable value of the imported goods, the "Confirmation of royalty payments" field should be indicated as "Yes".
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If a taxpayer underpays or does not pay tax due to incorrect filling or failure to declare the royalties within the prescribed period, the Customs authorities may charge an overdue fine at 0.05% of the underpaid or ignored tax daily for the period from the date of tax payment or release of goods to the date when the Customs authorities finds out about the violation.
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Risk and impact on the taxpayer：
The Customs authorities has improved on the collection of royalties for imported goods with the implementation of import laws and regulations since 2016. Bulletin 20 in 2016 requires a buyer to report whether he pays the royalty to the seller or the relevant party, directly or indirectly, which formally regulates the royalty process. Based on Bulletin 20 in 2016, Bulletin 13 added the filing requirements on whether or not imported goods should include royalties. For example, if a buyer is unable to confirm whether the royalty payment is for the imported goods and indicates in the Form as "No", the buyer will increase his risk of being investigated.
Bulletin 20 in 2019 is an administrative regulation issued by the Customs authorities for subsequent taxation of royalties. Bulletin 58 simplifies the declaration of royalties and adds the penalty provisions, hence improving filing regulations and subsequent management. The issuance of Bulletin 58 is a summary of the Customs authorities’ enforcement on duty collection of royalties. The managing of royalties for imported goods has become more stringent and relevant declaration data has been included in the Customs authorities’ import and export database for risk control measures. This is a risk that should be carefully managed and avoided by taxpayers.
Our suggestions and solutions：
1. Self-examination and preparation of supporting documents
Taxpayers are responsible to provide proof of documentation in the case of a customs inspection. It is, therefore, essential that tax payers prepare the supporting documents in advance. Since Bulletin 58 stipulates that overdue fine could be reduced for taxpayers who actively disclose whether royalty fees are paid or not, it is recommended that taxpayers with royalties self-examine and report to the Customs authorities proactively to eliminate incurrence of overdue fines.
It is recommended that taxpayers first review their current purchases from overseas, royalty payments, other non-trade payments, and transfer pricing policies to identify whether they are required to fill in “Yes” in the “Confirmation of royalty payments” field in the declaration form. Secondly, Bulletin 58 stipulates that subsequent tax declaration should be reported to the Customs authorities within 30 days after each royalty payment is made. Considering the large amount of supporting documents and materials for overseas remittances and tax filings need to be prepared, 30 days may be insufficient for some taxpayers to collect and prepare all the necessary documents. It is, therefore, recommended that taxpayers discuss with the Customs authorities on alternative plans to pay the royalty fee and prepare the relevant documents in advance.
2. Actively communicate with the Customs authorities
Taxpayers should fulfill the requirements of tax filings according to the relevant instructions. In case of any force majeure and/or other circumstances, taxpayers should communicate with the Customs authorities in advance if they are unable to complete the declaration within 30 days after the royalties are paid.
If taxpayers identify problems during the reviewing process, we would recommend that he should actively communicate with the Customs authorities and prepares the supporting documents to obtain understanding and approval from the Customs authorities. Taxpayers should also discuss the solutions with the Customs authorities to ensure compliance of customs declaration and to minimise the impact on their daily operations.
Our services：
If your company has been investigated by the Customs authorities on the royalty for imported goods, or if you have any question about customs royalties, please feel free to contact our team.
How we can support:
- Review royalty payments, other non-trade payments, and the list of imported goods to determine if royalty payment should be included in the dutiable value
- Draft an explanation letter to address questions raised by the Customs authorities during the investigation and submission of supporting documents
- Conduct subsequent tax declaration of royalties and/or any other matters according to the Customs authorities
For more information, please contact our
China Business Advisory Tax Advisory Service team.
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