China Tax Alert - Issue 13, April 2019
On 23 January 2019, the General Administration of Customs (“GAC”) issued Announcement on Adding a Customs Supervision Mode (“Announcement No. 20”), announcing to add “Deferred Duty Collection on Royalty Payments” (supervision code 9500). On 27 March 2019, GAC issued Announcement on Declaration Formalities of Royalties (“Announcement No. 58”), stipulating the declaration, tax payment, surcharges for overdue tax payment and other issues of dutiable royalties.
During the past a few years, China Customs has been putting scrutiny in determining the dutiability of royalties. Since 30 March, 2016, “Three Confirmations” (i.e. “Confirmation of Special Relationship”, “Confirmation of Price Impact” and “Confirmation of Royalty Payments”) have been added to the customs declaration forms, which indicated stringent enforcement of customs with regards to import tax collection of royalties and attention towards customs valuation matter. At the beginning of 2018, GAC issued a draft regarding declaration and tax payment related matters of royalties and sought opinions from different Customs as well as import and export enterprises. Announcement No. 20 and Announcement No. 58 have been finally issued after several rounds of amendment. In particular, Announcement No. 58 stipulates how customs should enforce customs duty collection of royalties, and provided detailed requirements about the time of declaration, declaration method and other aspects. The announcement is one of the important measures taken by China Customs to enhance trade facilitation promoted by World Customs Organization.
To understand more about the two announcement, below outlined requirements set out by GAC for royalties since 2016:
|
Regulations |
Date of Issuance and Effective Date |
Requirements of Royalties Declaration |
1 |
GAC Announcement [2016] No. 20 | Issued on 24 March 2016, Effective from 30 March 2016 |
|
2 |
GAC Announcement [2017] No. 13 | Issued on 16 March 2017, Effective from 29 March 2017 |
|
3 |
Announcement [2019] No. 20 | Issued on 23 January 2019, Effective from 1 March 2019 |
|
4 |
Announcement [2019] No. 58 |
Issued on 27 March 2019, Effective from 1 May 2019 |
Added “Declaration form for dutiable royalties”. |
Detailed updates in Announcement No.58 are as following:
1. Filling in “Confirmation of Royalty Payments” in Customs Declaration Form
2. Requirements on declaration time of dutiable royalties
3. Requirements of customs declaration
4. Filling Requirements of the Declaration Form for Dutiable Royalties
5. Late payment surcharges
Issuance of Announcement 20 and Announcement 50 represent that declaration of royalties has been changed from the mode of tax repayment requested by the Customs to a self-declaration by enterprises. Enterprises should regard royalties as a special type of goods and report to the Customs with declaration forms. Enterprises making royalty payments (especially those that made dutiable royalty payments) should note the following:
1. How to get well prepared for the effectiveness of Announcement 58 on 1st May?
Compared with the 180-day transition period mentioned in the draft regulation earlier released, there is no longer a transitional period in Announcement 58. Since Announcement 58 has outlined detailed filling requirements for the declaration form, the enterprises that have already negotiated tax payments regarding royalties with the Customs are recommended to finish declaration and tax repayment by end of April.
2. How to deal with the change in filling requirements of “Confirmation of Royalty Payments” in declaration forms?
It is raised in Announcement 58 that, no matter whether the royalties are included in the price actually paid or payable, “yes” should be filled in “Confirmation of Royalty Payments”, which is different from what was earlier raised in Announcement 13 issued in 2017. For those enterprises that have royalties included in the price paid or payable, answer was a “no” and now the answer would become a “yes” from 1st May.
Furthermore as good news, Announcement 58 states that only dutiable royalties related to imported goods should be stated as “yes” and those not dutiable and not related to import goods should be stated as “no”. Compared with the previous regulation, although only “dutiable” has been added, the new rule has been aligned with Measures of Customs Valuation and resolve the confusion of the enterprises through clarifying that “yes” should only be stated if royalties satisfy both criteria (i.e. being “related” and “constitute condition of sales”).
3. How could the enterprises stay aligned with requirement set out by the Announcement that customs declaration should be conducted within 30 days after royalty payments made?
The biggest change in Announcement 58 is to stipulate the declaration period for royalties and late payment surcharges will be collected if the enterprises fails to declare in time. Considering that there are quite many documents to be included in the package for submission, it is recommended that preparation work should be started from the beginning of planning of remittance of royalties.
For royalties that have been identified by the Customs as should be declared periodically, the relevant enterprises should contact the in-charge customs for switching to new declaration mode as soon as possible, to avoid surcharges incurred due to the new requirement to report within 30 days after remittance.
It is also stipulated in Announcement 58 that the surcharges could be mitigated for enterprises that carries out self-disclosure. For enterprises that have dutiable royalties, self-disclosure are recommended to avoid late payment surcharges.
4. How to prepare the large number of appendix documents included in Declaration Form of Dutiable Royalties submission package?
Declaration Form of Dutiable Royalties requires that the enterprises should provide an explanation on dutiability of royalties together with various other documents which requires management team to be equipped with good specialized skill on customs valuation.
In addition, Announcement 58 also requires data in declaration form, where declaration form number of the relevant form should be provided if the royalty payments are matched with single customs declaration; if royalty payments are matched with multiple declaration forms or multiple items, related declaration forms numbers and item numbers should be included in appendices to the Declaration Form of Dutiable Royalties. Customs operation system should be set up or upgraded to reflect detailed information of imported products and should be able to calculate and summarize the relationship between import products and dutiable royalties through formula agreed with the Customs.
Announcement 58 also has areas to be further improved. For example, the Announcement stipulated that the declaration should be made after payment of royalties while accrued royalties which has not yet been paid has not been regulated. However, according to Measures of Customs Valuation, dutiable royalties, no matter paid or payables, should be included in the dutiable value. In addition, the same document package is required to be submitted each time for the declaration, which would bring significant administration burden of the enterprises. It is recommended that Customs may consider keeping the first filed documents as record and no longer requires repetitive documents to be included in the package of Dutiable Royalties Declaration Form.
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