Benchmarking your import operations and cross-border compliance

Transcription

1 Benchmarking your import operations and cross-border compliance Fashion Apparel Retail Sector February 212

2 1. Introduction Industry Outlook In 212, online apparel sales will emerge as a major retail market segment. Their importance will continue to grow in the next few years. China is the star performer with a demand forecast of 8.4% growth in 212. China will also be the top contributor worldwide to growth in luxury sales through 214. Luxury sales in Mainland China rose 3% in 21 and were forecasted to grow 25% in 211. Cross-border Regulatory Environment In order to control and supervise the import and retail of apparel, footwear and accessories, the authorities in China have been tightening their controls on and examination of various tariff and non-tariff issues. Specifically, the tariff rates for imported apparel, footwear and accessories are still comparably high. Technical areas such as customs valuation and tariff classification are the key focus for Customs authorities when clearing products. Furthermore, since 1 January 211, apparel products have been subject to compulsory inspections by Commodity, Inspection and Quarantine (CIQ) at import, where the product quality inspections happen on a routine basis. Source of the Data A survey questionnaire was distributed to around 5 people from 18 leading fashion brands, who attended the fashion retail roundtable event that was hosted by PwC on 23 November 211. In order to obtain essential information for a comprehensive overview of various technical and operational issues, the posed questions covered a fairly wide range of topics. Objectives of the Survey This survey aims to derive comprehensive statistical information from various importers regarding their import operation and regulatory compliance, and to provide you with an overall picture of the most challenging areas and best-practices for the fashion retail sector.

3 2. Controlling the landed costs Landed costs, in terms of customs duty and/or consumption tax, can account for up to 4% of the import value. Landed costs could directly impact the financial performance of fashion retailers on their Profit & Loss (P&L) statement. The following questions are designed to provide you with a list of issues that fashion retailers will consider in the solutions adopted to control their landed costs. 18% 29% 1. What compliance issues relating to landed costs have frequently been challenged by Customs? 53% Customs Valuation 53% HS Classification 29% Origin 18% 4% 4% 13% 8% 21% 5% Royalty 5% Arm s length pricing 21% Freight and insurance 13% Bonded warehousing & logistic 8% Tooling assists, packaging costs etc. 4% Other (e.g. commission, warranty) 4% 48% 4% 48% Yes 48% No 48% Voluntarily submitted 4% More than 5% of the respondents indicate that valuation is the most scrutinized area by Customs for fashion apparel. With an average customs duty rate of 14%, import VAT of 17%, and a consumption tax assessed on certain fashion accessories, Customs has a high incentive to review the declared value and ensure collection of all applicable duties and tax. 2. Which Customs valuation issues have been audited or investigated by Customs in 21 and 211? Whether or not royalty fees are dutiable is the key issue China Customs is auditing or investigating for companies in the fashion retail sector. For example, payments for using a trademark or for distribution rights would attract Customs attention. Additionally, arm s length pricing is also a major issue for luxury brands, especially if they are attaining relatively high profit margins in China. 3. Did Customs request that companies provide their Transfer Pricing Documentation (TPD) for review in 21 and 211? Nearly 5% of the respondents provided TPD to Customs for review. This indicates an increased trend for Customs; they are starting to more closely review importers TPD. The functional analysis and the benchmarking result sections of the TPD are the key areas that they study. It is highly recommended that the TPD is closely reviewed internally before a company submits it to Customs as the TPD does not guarantee that the declared price is arm s length for Customs valuation purposes. PwC 1

4 33% 13% 8% % 42% 4% Obtained from authorized Brokers 42% Never attempted 33% Obtained a ruling from Customs 13% Obtained a decision from audit 8% Obtained internal rulings 4% Attempted but failed to obtain % 11% 4. Who has obtained or attempted to obtain a tariff classification ruling from Customs? Approximately 4% of the respondents have been able to obtain tariff classification rulings from authorized Brokers, since the possibility of obtaining an official ruling from Customs is comparably low. For industry players, obtaining rulings from authorized Brokers is a proactive strategy to manage the risk of additional customs duty and the risk of imposed penalties due to non-compliance. However, Shanghai Customs have raised concerns about the quality of the Broker s work, so an element of quality control is still required. 5. Who has utilized Free Trade Agreements (FTA) to achieve landed costs savings? 3. Attaining operational excellence Some fashion retailers are adopting a fast-fashion approach to respond quickly to clothing trends and to offer the latest styles to customers. The fast-fashion concept requires a high turnover of stock and a reduction of the shipping and customs clearance time. Thus, efficient management of supply chain operations to strengthen customs compliance levels, save costs and increase overall operational efficiency, is crucial for enterprises in the fashion retail industry. The double-digit sales growth in Asia shows the strategic importance of the Asian market. Unsurprisingly, fashion retailers have been building up their regional hubs to quickly service the Asian market. 32% 18% 39% ASEAN 39% Other FTA 18% Under Planning 32% Never thought 11% More than 5% of the retailers have been using FTAs to reduce the duty costs on products that are eligible for preferential treatment when imported into China. Specifically, the ASEAN-China FTA is used by most of the respondents whenever possible. Another one-third of respondents are planning to use an FTA in the future to legitimately reduce customs duty and VAT costs in their supply chain. China is currently negotiating an FTA with Switzerland, which may offer new duty saving opportunities on watches and jewelry. 31% 69% Yes 69% No 31% 1. Who acts as the Importer-of-Record (IoR) for importation? Although approximately one-third of the respondents still use an Import/ Export Agent to act as their IoR, it is the industry trend for companies to act as their own IoR. This is because companies wish to have tighter operational controls (including for foreign exchange remittance) and save service provider costs by moving certain functions in-house. 68% Yes 24% No 68% N/A 8% 4% 8% 24% 2% 4% Yes 2% No 4% N/A 4% 6. Who has faced loss of origin due to the temporary storage of products in a distribution center (DC) or due to 3rd party invoicing? Although utilizing an FTA could be an efficient regime to reduce landed costs, 2% of the respondents have faced a loss of origin issue due to temporary storage in a DC or due to 3rd party invoicing. Under the ASEAN-China FTA, the new version of the Form E provides the solution of using a Movement Certificate to alleviate the risk of loss of origin due to temporary storage in an intermediate country. The so-called 3rd party invoice can also now qualify if certain conditions are met. Bilateral FTAs tend to not allow 3rd party invoicing, whereas regional FTAs are more open to this type of business model. 7. Have you ever been penalized by Customs due to incorrect tariff classification or incorrect customs valuation issues? Approximately 2% of the respondents have been penalized (financial penalty) by Customs due to use of an incorrect tariff classification code or customs value. Therefore, compliance with Customs is still a high priority issue for the fashion retail sector. That being said, it may be possible to settle potential Customs issues without a financial penalty, paying only applicable duty claw-back (subject to negotiation on a case-by-case basis). Grade AA 27% Grade A 19% Grade B 31% Don't know 23% % 31% Sea Freight < 3 days 3-7 days > 7 days Air freight 27% 19% < 1 day 1-2 days > 3 days 2. For Customs purposes, what is the enterprise classification rating of the importer, the I/E agent or the Customs Broker? Most of the importers, their I/E agents or their Customs Brokers have an enterprise classification rating of AA, A or B. However, 23% of the respondents do not know the enterprise classification rating for Customs purposes. Category AA and A are the preferred ratings, as this can result in expedited clearance time and simplified customs clearance procedures. 3. What is the average import clearance time for imported apparel? For sea freight, the majority of the respondents suggest that the clearance time is between 3-7 days. For air freight, less than 5 of the respondents claimed that the clearance time is within 2 days. 2 PwC PwC 3

5 Key Measures Respondents Engaged external 18 assistance to work with Customs Met with Customs to 16 resolve the issues Enhanced internal 16 compliance management Provided a guaranteed 13 deposit for clearance Increased shipping 12 accuracy Switched Customs Brokers 6 HK/Singapore 26% China 33% US/EU 41% % 26% 33% 1 port 2-3 ports > 3 ports 4. What measures have companies taken to address clearance issues? More than half of the respondents claim that they meet with Customs in order to resolve the issues. To ensure a smooth clearance process, Customs normally requests that the importer provides a cash deposit when customs valuation and tariff classification issues exist. External consultants are engaged by many importers to provide technical support and to formulate strategies. In addition, many importers are taking actions to improve their internal awareness of regulatory compliance and risk management. To reduce the lead time and to better manage their supply chain, importers are also reviewing shipment accuracy and broker performance. 5. Who has a regional distribution center (DC) already established for sales into the Asian market? More than 4% of the respondents have not yet set up a regional DC in Asia. However, nearly 6% of the respondents are now operating a DC in HK/ Singapore or Mainland China. This indicates that the fashion retail sector now considers the Asian market to be of strategic importance. Mainland China is a preferred destination for establishment of a distribution center as operating costs (storage and labor) are typically lower than HK/Singapore. 6. How many gateway ports are used for imports into China? More than half of the respondents state that they use only 1 port for importation. This is consistent with our previous benchmarking for the fashion retail industry. Shanghai Pudong International Airport ( PVG ) is the most frequently used port for goods imported by air into China, due to the companies high turnover of inventory and lead time requirements. For importers using more than 1 gateway port, it is important to understand the existence of local policies which may cause clearance time uncertainty. The local declaration, port release mechanism could potentially be applied and adopted by importers to manage and facilitate imports through multiple ports in China. 31% 18% 33% 51% Product quality testing 51% Product labeling 31% Import licensing 18% 4. Overcoming market access barriers Since 1 January 211, the AQSIQ has implemented 1% statutory inspection for most of the License A apparel products. Physical inspection includes inspection of the product as well as its labeling. When inspected, a sample must be sent for testing and be given a certificate by the local CIQ bureau. The clearance time has been adversely affected, as the estimated time for such testing is approximately 3 days. This also impacts inventory holding volumes and store sales. 1. Which consumer protection mechanism is most critical for daily import operations? Half of the respondents claim that product quality testing is the most critical issue for their daily import operations. However, 31% of the respondents also believe that product labeling has impacted their daily cross-border operations. 2. What is the approximate physical inspection rate for imports via China ports in terms of quality testing and labeling? As all imported apparel has been subject to the License A requirement since 1 January 211, the apparel industry has been facing CIQ inspection in accordance with the national standards. This is the reason that several respondents are still experiencing a high rate of inspection. 1% 8-99% 6%-79% <6% From an initial concern/experience of 1% inspection checks, respondents state that they are subject to a relatively lower physical inspection rate (i.e. less than 6%). Since several companies now actively seek pre-testing with the CIQ lab, inspection rates for some importers has decreased. 4 PwC PwC 5

6 % 8-99% 6%-79% <6% 61% 39% Yes 39% No 61% 3. What is the approximate sampling rate for CIQ lab testing via China ports? The result is same as that of Question 2 above. This indicates that port CIQ tends to send the samples to the CIQ lab for testing, if they conduct a physical inspection. However, if a pre-testing certificate has been obtained and presented to port CIQ, the sampling rate could be lower. 4. Who has joined the pilot program called classified enterprise management via the Shanghai Pudong International Airport? Around 4% of the respondents state that their companies have participated in the pilot program, while the remaining state that they have not. The pilot program is currently on hold. A new CIQ Enterprise Rating system is expected to replace the pilot program in 212 and many companies are now aiming to position themselves to obtain a favorable rating under the new system. A favorable rating should result in reduced clearance costs and times. 44% 56% Yes 56% No 44% 19% 16% 16% 49% 7. Do you conduct pre-testing with the CIQ lab? Although around 4% of the respondents state that their companies participate in the pilot program, 56% of the respondents are conducting pre-testing with the CIQ lab. This indicates that there is an increased trend for a non-pilot company to conduct pre-testing with the CIQ lab. According to a recent update from the CIQ lab, enterprises intending to participate in pre-testing with the CIQ lab from 1 January 212 are required to lodge a written application with port CIQ. The application will be examined and approved by the CIQ Supervision Division and port CIQ. 8. Excluding Customs, which government authority has the most significant impact on import operations? Nearly half of the respondents claim that CIQ has been the most influencing authority for the fashion retail sector. Other authorities such as AIC and CPB also have an impact on operations, but perhaps more so at the retail level. 45% 3% 25% 5. Have benefits of the pilot program been realized via Shanghai Pudong International Airport? More than half of the respondents feel that the benefit has been fully or partially realized. However, the remaining 45% of respondents do not recognize any benefits of the pilot program. They feel that they have spent time and money on pre-testing, but still face complex procedures. CIQ 49% Administration Office of Import and Export Endangered Wild Animals 19% AIC 16% Commodity Price Bureau 16% For luxury retailers who import products made from endangered wild animals or flora, it is also important to proactively liaise with the authorities who issue the CITES permit at both the provincial and the state levels. Yes 3% Partially 25% No 45% 6. Have products been delayed for sale in retail stores due to inspection or quality testing? 2% 8% Yes 8% No 2% Due to the compulsory inspection and/or quality testing requirements, 8% of the respondents are experiencing a delay for sale to retail stores. Generally speaking, once a product is selected for inspection, Shanghai CIQ may require up to 3-4 weeks to confirm whether or not the quality of the product complies with the Chinese standards. However, as different port CIQ bureaus may have local policies for requirements and timeframes of testing, there exists uncertainty for managing the sale to retail stores. 6 PwC PwC 7

7 5. Internal Responsibility Contacts Due to the complexity of the regulatory environment, several different departments within a company have been involved in dealing with Customs and other non-tariff issues. Based on our experience, a dedicated customs affairs team is normally structured under the Legal or the Tax group, who function independently from the day-to-day import/export operations. For further assistance about PwC s customs and international trade services please contact: 1. Which departments at your company are responsible for the following cross-border regulatory issues? The Logistics Department is the main business unit that is responsible for dealing with customs and other trade related issues. If a specific Customs Department is established within the company, it is also the key business unit that works with the various authorities. When confronting valuation issues, the Finance Department is involved for providing financial figures and economic analysis. Damon Paling Partner, Shanghai +86 (21) damon.ross.paling@cn.pwc.com Colbert Lam Partner, Southern China/Hong Kong colbert.ky.lam@hk.pwc.com Susan Ju Partner, Beijing +86 (1) susan.ju@cn.pwc.com CIQ related issues, such as quality testing and product labeling, are either handled by the Logistics Department or by other specialized departments. For more information, please also visit: Topics Finance Customs Logistics Legal Tax Others Customs Valuation Tariff Classification Origin Customs Clearance CIQ quality testing Product labelling Import Licensing PwC Customs & International Trade Practice Customs and international trade in China is complex. However, a planned and structured approach with the right resources assigned results in cost savings, higher levels of compliance and fewer unwanted surprises during an audit. PwC specialists within our Greater China customs and international trade practice provide a wide range of advice and services related to creating value, ensuring compliance, and managing risk in relation to the movement of goods into and out of China. 8 PwC PwC 9

8 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC Worldtrade Management Services (Shanghai) Co., Ltd, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 212 PwC Worldtrade Management Services (Shanghai) Co., Ltd. All rights reserved. In this document, PwC refers to PwC Worldtrade Management Services (Shanghai) Co., Ltd. Which is a member firm of PricewaterhouseCoopers International Limited ( ), each member firm of which is a separate legal entity.