In recent years, customs authorities have introduced various measures to support the healthy development of enterprises. One such measure is the expansion of the scope of enterprises that are eligible to voluntarily disclose their violations and be exempted from penalties as a result of such disclosure, along with raising the upper limit of fines to one million yuan. Notably, a company’s credit in the Customs ERP system will not be affected by these disclosures (please refer to the attachment for specific content).

Many Chinese enterprises, especially those prioritizing trade compliance, are also considering leveraging these facilitative measures to address challenges faced in daily operations, such as ensuring the accuracy of import declaration prices, tackling discrepancies in HTS codes, and others. While these companies have good intentions, from a legal perspective, it is essential for them to exercise caution and carefully evaluate beforehand whether they meet the requirements of customs voluntary disclosure, and if proactive disclosure is necessary to resolve potential issues.

Firstly, it is crucial to recognize that an important prerequisite for voluntary disclosure is a disclosing company’s actual illegal acts that violate customs regulations. Therefore, companies must assess whether defects in their daily operations, such as the inaccuracy of price declarations and discrepancies in HTS codes, constitute illegal acts. Secondly, companies should adopt a holistic and comprehensive legal approach (i.e., understanding technical dispute facts, evidence chains, remedies, and resolution methods from a legal perspective) to analyze and determine whether to conduct voluntary disclosure or to take other measures to mitigate losses and resolve challenges. To provide context, we will present a 2023 classification case as an example for analysis.

Background of the Case

A well-known foreign-funded enterprise that takes the issue of trade compliance seriously engaged on multiple communications with the customs regarding the HTS codes of its products from 2013 to 2020. These communications included pre-classification in earlier years and subsequent customs audits to determine the appropriate HTS codes of the products in question. In each instance, the company declared the HTS codes confirmed or recommended by the customs.

However, in 2023, following an internal review and consultation with one of the Big Four accounting firms, it was believed that there was a misdeclaration of the customs tariff number for a product. The primary reason for such discrepancy was the belief held by the foreign headquarters of the enterprise that the HTS code for this product should be unified rather than the same product adopting different HTS codes between domestic and international markets. The accounting firm calculated that the misdeclaration would translate into an additional tax amount for the preceding three years, which, combined with the estimated maximum fine arising therefrom, would total about USD 1 million, and the accounting firm recommended the enterprise proactively disclose such discrepancy to the customs.

Our View

It is important to note that since 2013, the enterprise has engaged a third-party consulting firm every two years to conduct customs pre-classification for the product and has declared it accordingly. Furthermore, when Shanghai customs inspected the product classification, the enterprise submitted explanatory materials, and no requirement to change the declared HTS code was imposed by the authority. In other words, the enterprise has fully complied with Article 2 of the “Customs General Administration’s 2012 No. 2 Administrative Interpretation (Interpretation on the Misdeclaration of Commodity Classification)”[1]. If the customs has conducted a substantial classification review of the tariff number declared by a declarant and decided to clear and release the imported and exported goods, a subsequent reclassification or declaration of the same goods as incorrectly classified should not constitute a violation of misdeclaring the tariff number. Accordingly, in this case, the customs should not impose administrative penalties but should fix the discrepancy by amending the customs declaration sheet (报关单) and, if applicable, collecting additional duties. The aforementioned substantial classification review may take on the forms such as testing and inspecting the composition of the goods without questioning the classification determination, inspecting and verifying the classification, reviewing the supplemental materials of classification matters, or amending the classification matters on the customs declaration. Based on this, we believe that there is still room for discussion on whether it was the best course of action for the client to proactively disclose to the customs the situation as misdeclaring the tariff number.

Recommended Actions

According to the existing customs system, we propose the following actions:

1、First, establishing an informal communication with the customs official responsible for product classification in advance to obtain professional opinions, which would serve as the basis for subsequent actions to take (With many professional regulatory functions in fields such as pricing, classification, origin, inspection, and quarantine, it is important to consult with the appropriate official to obtain authoritative insights.)

2、Then, applying for a customs pre-ruling (other approaches may also be effective, depending on the situation) to obtain the classification result in a written form recognized by the customs. (The customs pre-ruling is valid nationwide for three years and is one of the most effective systems for confirming customs affairs such as classification, origin, and price.)

Although the above steps sound simple, their implementation entailed rounds of communications, discussions, evidence presentations, and demonstrations with the appropriate official. Additionally, a series of discussions with the client’s domestic and foreign product technical managers and business teams were conducted to track the historical changes of the product and other related issues. Ultimately, the official responsible for the product agreed that the tariff number to which the product should be classified concurred with our opinion. Although the classification falls into a new customs code, there is no import tax difference with the current code, which provides strong support for the client to be spared from substantial additional taxes and fines More importantly, there was no need to conduct voluntary disclosure to solve our client’s HTS code issue.

Experiences and Recommendations for Enterprises

Based on the aforementioned case and our experience in customs and import/export matters, as well as changes in customs practices, we provide the following suggestions for reference:

1、Various administrative regulations, local regulations, rules, and regulations in the field of customs and import/export all fall within the scope of law. It is recommended that enterprises engage lawyers specializing in trade compliance

When declaring a product’s HTS code to the customs, enterprises engage in a legal act that requires a strong emphasis on the integrity, legality, and rationality. Addressing customs matters necessitates careful consideration of not only customs’ routine law enforcement but also interpretation of the aforementioned legal acts in the context of legal dispute resolution, including but not limited to administrative reconsideration and litigation. Therefore, lawyers are advised to think from both the non-contentious and the contentious perspectives (bottom-line thinking) and thereby provide enterprises with more comprehensive and effective suggestions.

2、Chinese Customs value the involvement of the expertise of lawyers in addressing such issues

Through our interactions with the General Administration of Customs, the Anti-Smuggling Bureau, and local customs offices (in Shanghai, Guangzhou, Shenzhen, Tianjin, etc.), as well as various governmental departments (tax management center, pricing information office, audit department, etc.), it can be seen that the customs authorities are increasingly inclined towards the involvement and professional inputs of lawyers.

The customs values consistency and impeccability in law enforcement, however, customs officers come from different backgrounds, and many of whom lack legal practice experience. Engaging lawyers will guarantee effective discussion on professional issues with the customs, assist the customs to carry out precise and consistent law enforcement, and help to mitigate legal risks arising from subsequent administrative reconsideration and administrative litigation.

3、Legal review of the HTS code of the same product for multinational enterprises

From a technical standpoint on customs commodity classification, discrepancies in HTS codes used by foreign-funded enterprises and their overseas counterparts in the export and import activities are commonplace. Despite the fact that importing and exporting countries (regions) generally follow the unified and coordinated system of the World Customs Organization for commodity classification, under which the first four or six digits of the tax number are generally the same, each country (region) still retains the right to interpret and apply the customs classification of goods imported into its territory according to its tax law, annotations, decisions, rulings, etc. There are instances where domestic customs do not recognize the HTS code determined by foreign customs in accordance with the domestic laws and related commodity classification annotations and decisions, as the first four digits of the code are inconsistent.

Therefore, in practice, it is possible for the same product to have different HTS codes across different countries. However, enterprises must ensure each code is backed by a strong legal basis to mitigate legal risks associated with inconsistent HTS code classifications.

4、Determining the Appropriate Solution

Identifying an effective solution necessitates appropriate methods. Engaging an experienced lawyer with a deep understanding of customs regulations and international trade can significantly contribute to this endeavor. As in the aforementioned case, based on the information provided by the client, we made a preliminary assessment from a legal standpoint and formulated the appropriate strategic solution, preventing unfavorable consequences where the client could have been accused of making a misdeclaration of the HTS code, thereby sparing the client additional taxes and potential penalties.

To put our strategies into actions, we engage in discussions with customs officials and agencies responsible for product classification to obtain authoritative insights in a bid to help our clients to navigate customs facilitation measures. We understand that the pre-ruling application may not be smooth in certain cases (as some enterprises may not be able to fully meet the requirements of the officials in charge of pre-ruling (under the pricing information department)), we recommend inspection and evaluation to obtain customs internal Q&A regarding classification matters, thereby ultimately ensuring compliance with regulations.

Conclusion

The progressive expansion of the scope of reduced or exempted penalties for voluntary disclosure by the customs undeniably benefits enterprises. However, enterprises should thoroughly assess whether their routine operations could be categorized as “illegal acts”, and the same level of caution is advisable for other favorable policies. It is particularly important for enterprises to evaluate technical issues, such as customs commodity classification, pricing, and origin, to avoid challenges or adverse implications on future operations arising from their “ignorance of the law”.

Appendix

The expanded circumstances in which enterprises are exempt from penalties when voluntarily disclosing violations include:

1、The timeframe for voluntary disclosure of tax-related violations is relaxed to six months (with no limits on underpaid or unpaid taxes) or two years (if the underpaid or unpaid taxes are either below 30% of the total tax owed or amount to less than one million yuan).

2、Additional scenarios where penalty exemptions for voluntary disclosure are applicable include violations affecting national export tax rebate management, instances of non-compliance in processing trade activities, inaccurate declarations affecting customs statistics or regulatory order, violations of customs regulations on goods supervision, and specific breaches of customs inspection and quarantine rules.

For Authorized Economic Operators, the timeline for voluntary disclosure of tax-related violations (without any limits on amounts and actions affecting national export tax rebate management) is further extended from six months (applicable to other enterprises) to one year. In cases where the overdue tax is below 30% of the total or amounts to less than one million yuan, the disclosure period remains two years. Additionally, Authorized Economic Operators that voluntarily disclose violations will continue to benefit from customs facilitation measures during the investigation period.[2]

[注] 

[1] Effective from February 1, 2013.

[2] Announcement on Handling Issues Related to Proactive Disclosure Violations (General Administration of Customs Announcement No. 127 of 2023), effective from October 11, 2023, to October 10, 2025.  

Announcement of the General Administration of Customs on Handling Issues Related to Proactive Disclosure Violations by Authorized Economic Operators (General Administration of Customs Announcement No. 87 of 2024), effective from July 22, 2024.