Legal Position of Anti-Smuggling Risks in Processing Trade
|December 21, 2016||Posted by admin under China M&A, English, Investment in Emerging Economies, Startups, VC/PE|
To most foreign invested enterprises (“FIE”) that carry out a reasonable compliance standard, smuggling should be a rather remote concept. However, this may not be the case for those FIE that treat Chinese operation as the sourcing site and relies heavily upon the business model of processing trade (in a nutshell, processing trade refers to importation of materials free from Chinese duties and VAT (“Bonded Materials”) to manufacture finish goods and in turn export such finished goods back overseas pursuant to Chinse laws and regulations.
If such finished goods containing Bonded Materials are not exported back but sold domestically, the Chinese duties and VAT shall be paid, failing which on time may incur serious legal liabilities. Therefore, it takes substantial efforts by way of a very systematic approach to monitor, track and manage the whereby of the Bonded Materials. Otherwise, simply unauthorized mixed use of Bonded Materials and non-bonded materials (“Mixed Use”) may lead to indirect domestic sale, subject to the facts and evidence on a case by case basis, and thus be found as smuggling activities and subject to criminal penalty, administrative penalties and other business interruptions.
We would set out below a brief legal position which should effectively claim down the client in case of custom’s dawn raid investigation in the nature of a criminal case for smuggling.
- Criminal Penalty
Under Article 153 and 154 of PRC Criminal Law, corporate smuggling crime for ordinary goods will be found if: (1) objectively, bonded goods / materials are sold within China for profit without custom’s approval and payment of overdue duties / taxes; and (2) subjectively, corporate intent for profit is found.
In case a company smuggling crime is convicted and the tax evasion amount is between RMB 0.2 – 1 million, the company will be subject to fines of 1-5 times of the tax evasion amount and the persons who are directly in charge (“直接负责的主管人员”) and the other persons who are directly responsible for the offence (“其他直接责任人员”) (collectively “Responsible Individuals”) will be subject to imprisonment or criminal detention for less than 3 years. If the tax evasion amount is between RMB 1 – 5 million, the Responsible Individuals will be subject to imprisonment for 3 – 10 years. If the tax evasion amount is more than RMB 5 million, the Responsible Individuals will be subject to imprisonment for more than 10 years or lifetime imprisonment.
- Administrative Penalty
The custom penalty regulation provides for various forms of administrative penalty for different violations. The most heavily imposed administrative smuggling may be unauthorized movement of materials / goods under custom supervision outside of the bonded area by way of concealment, disguise, omission or forging the declaration or other means to get away from custom supervision.
If administrative smuggling is found (except for special conditions of revocation as described below), the administrative penalties will include that:
- Smuggled goods subject to duties / taxes or other illegal income will be confiscated;
- Fine in the amount of less than 3 times of the tax evasion amount will be imposed;
- Warning will be given by custom;
- An order to correct the non-compliance and suspend the operation as approved by custom (such as transportation, storage, processing trade, assembling, consignment sale, exhibition, etc) (“Approved Operation”) for 6 months;
- Revocation of governmental registration for the Approved Operation if smuggling crime is convicted or administrative smuggling is found for twice within the period of 1 year.
- Other Business Interruption:
In addition to the foregoing penalties, the custom may cancel or tighten other facilitating administrative procedures at its discretion. Strictly speaking, such measures are not in the nature of penalties but may also impose significant business interruptions, which may include:
- The custom may ask for high amount of cash deposit or financial institution guarantee;
- The custom may not agree to proceed with certain processing trade facilitating procedure such as “Further processing through a transfer Operating”;
- The custom credit level may be downgraded.
Please note that this article is not contemplated to exhaustive or be relied upon as formal legal advice. Should you wish to know more about the details of this particular area of law, please send an email to firstname.lastname@example.org we would be more than happy to hear from you.