by Colbert Lam

China Customs recently issued a notice providing its first official clarification on the reporting and declaration of royalties in connection with imported goods. This notice provides that as of May 1 only dutiable royalties that meet certain requirements (i.e., articles 11, 13, and 14 of customs valuation regulation GAC order 213) must be reported on the customs declaration. For any dutiable royalties to be paid subsequent to importation, a dutiable royalty declaration form supplementing the customs declaration must be filed within 30 days of royalty remittance.

China Customs imposed the customs declaration requirement on royalties in 2016 to better administer the collection of duties on these payments. Since most companies are not familiar with the regulatory requirements and the interpretation of “dutiable royalty” for purposes of this declaration, they typically indicate that there are royalty payments associated with the import transaction by checking “yes” in the designated box without assessing the nature of the royalty or its dutiability. This practice contributed to China Customs’ decision to step up its nationwide audit of royalty payments over the past three years (click here for more information).

The new China Customs notice provides some helpful clarification on this issue and confirms ST&R’s previous understanding of the legal basis of royalty declaration. However, it also carries important legal implications. For example, the notice formally confirms the exact legal basis of those royalties that must be included on the customs declaration and states that failure to report and declare such royalties is a breach of customs law. Not only can such errors lead to charges for late payment of the associated duty, but China Customs may also refer any late reporting or failure to declare to the Anti-Smuggling Bureau to examine whether duties have been avoided, which may lead to Customs imposing an administrative penalty.

In light of the information set forth in this new notice, we believe China Customs will step up its review of royalty declarations and/or post-importation reporting in the future. Affected companies are therefore encouraged to run a full legal analysis from a customs valuation perspective and ascertain whether their royalties are dutiable prior to determining the best way to declare and report all dutiable royalties on import transactions for customs declaration purposes.

Despite this clarification, China Customs’ royalty reporting requirements remain complex. For more information or assistance developing an effective compliance or defense strategy, please contact Colbert Lam or Harry Zhang.

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