Importing & Retailing in China

Transcription

1 Importing & Retailing in China 6 May 2014 Webinar for US Fashion Industry Association

2 Your resource today Damon Paling Trade & Customs Partner, PwC Shanghai Damon has 16 years experience in Asia advising companies on customs, trade and related supplychain and logistics matters, the last 10 years of which have been spent in Shanghai, China. Damon assists clients in various areas, including: customs audit and investigation dispute resolution, customs compliance and opportunity reviews, establishing customs-supply chain efficient business models, establishing regional distribution centres, establishing a customs centre of excellence, reverse logistics and low cost sourcing. Damon has a Masters in Customs Law and Administration from the University of Canberra in Australia originally graduated in Business Studies in 1997 from the Auckland University of Technology. Damon is also a member of the AMCHAM Shanghai Customs Task Force. PwC Contacts China Damon Paling +86 (21) damon.ross.paling@cn.pwc.com United States Maytee Pereira Director, New York maytee.pereira@us.pwc.com Maytee has over 20 years experience in the area of customs law and international trade

3 Purpose The purpose of this webinar is to provide you with updates on: - China trade compliance risks and strategies - China cost savings opportunities - China trade facilitation reform As a result of this webinar we hope that you can be better positioned to optimize your import and retailing opportunities in China. 2

4 Overview of China fashion retail industry

5 China s booming retail market Asian demand for fashion and apparel will continue to lead the world. Major international retailers will continue to expand in Asia with more tailored strategies being introduced in China. Despite high inflation and prices, China s retail sales is still expected to grow at a still impressive 11.1% by volume in Asian consumers now account for over half of global luxury sales. Online retailing continues to grow rapidly in Asia and even luxury brands will embrace online sales in the region. Retail sales in Asia (USD billion) PwC 4

6 The views of the CEO PwC s 17th Annual Global CEO Survey 1. For retailers, technology is a game-changing trend. 80% of retail CEOs ranked technological advances as one of the global trends that will transform their businesses most over the next five years % of retail CEOs said they were concerned about shifts in consumer behavior, with 28% saying they were extremely concerned. 3. Consumer goods CEOs and retail CEOs see the same economic policy threats: a growing tax burden, fiscal responses to debt and deficits, over-regulation and exchange rate volatility % of consumer goods CEOs are concerned about high, volatile raw materials prices. PwC 5

7 Trends Over 300 million internet users purchasing online Different income groups looking for different types of garments Urban residents disposable income rising by around 9% Retailing in China City-specific store, service and merchandise mix solutions required Shift towards a consumption based economy By 2022, the upper middle class will have income of USD 17,500 to US$38,000 PwC 6

8 Overall Market Access Tariff Barriers Relatively high customs duties and consumption taxes. Tariff rates ranging from 14% to 25% for apparel and fashion accessories Revenue collection a matter of national security and an important performance indicator for Customs. PwC % Non-tariff Measures Statutory inspection on Certificate A apparel products. Product quality & labelling requirements. Inspection of the same product that is routinely imported takes place. Clearance time largely affected during testing. Assume 3o working days for a CIQ lab test result whilst inventory is stored temporarily Clearance Times Improving efficiency and productivity is key; holding less inventory Routine customs broker review and evaluation Upgrading Customs & CIQ enterprise rating 28% Improved internal controls in 2013 Implementing paperless declaration 7

9 Customs Compliance

10 The Dutiable Value Dutiable (examples) Selling commissions Packing, Containers (treated as one) Assists Royalties Subsequent proceeds International insurance & freight (i.e. CIF) Non-dutiable (examples) In-country delivery costs In-country duties Discounts (trade / cash / quantity) Buying commissions Interest charges Other 6% 6% 8% 8% 28% 44% Which of your customs valuation issues have been previously audited or investigated? Arm's length pricing Royalty fees Other (e.g. commission, warranty etc.) Freight and insurance Tooling assist, packaging costs etc. Bonded warehousing and logistics costs PwC 9

11 The Dutiable Value (continued) 1. Can I obtain a written valuation ruling from China Customs? The pre-valuation programme was re-started in 2012 but only limited to certain commodities. Await expansion of the pilot pre-valuation rules. 2. Does Customs accept benchmarking comparables? Transfer Pricing Documentation (TPD) can be useful but may need to supplemented with additional comparables. Be mindful of markdown merchandise end of season sales when setting import prices. 3. What is the Customs Reference Price Database and can I reduce import prices? An important risk assessment tool for Customs and a key consideration for Retail importers. The database price ranges/points are confidential. Intercompany import prices can be reduced case-by-case. 4. Who in Customs is asking the questions? Port Customs, Verification Centre, Commodity Pricing Information Office and the Anti-smuggling Bureau may simultaneously be making enquiries PwC 10

12 Tariff Classification The HS classification of apparel products is technically complicated due to the existence of specific rules and lack of interpretation of the national subheadings at 8-10 digits level. The frequent changes of material compositions for seasonal products also cause the difficulty in managing the process of confirming and verifying the correct HS codes. HS 2012 version applied and China is preparing for HS Customs not only conducts audits on the HS codes for imports, but also focuses on the HS codes for exports as they relate to VAT refund and licensing requirements. Correlation between tariff rates and Certificate A to be managed. Customs brokers / logistics managers may adopt classification grouping PwC 11

13 Tariff Classification (continued) 1. What external strategies to retailers adopt for managing tariff classification compliance? PwC 2013 Survey for Fashion Apparel Sector: Who has obtained or attempted to obtain a tariff classification ruling from Customs? 6% 6% Obtained a Customs internal opinion during clearance 44% 38% Obtained a pre-classification ruling from Customs Obtained from an authorized customs broker Attempted but failed to obtain 6% Never attempted PwC 12

14 Preferential Origin PwC s 2013 survey for fashion apparel sector shows two-thirds of the respondents are utilizing FTAs to achieve duty savings. The ASEAN-China FTA is ranked as the most popular and strategic important agreement to reduce duty rates up to 0%. Meanwhile, products originating from India, Bangladesh and South Korea can also enjoy preferential duty rates under Asia-Pacific Trade Agreement. Have you experienced any of the following challenges under ACFTA? 12% 7% 26% HS code reconciliation between country of export and China Under 3rd party invoicing, Customs still requests for the "first invoice" "Loss of origin" due to 3rd party invoicing 15% Consignment through Hong Kong creates "loss of origin" 19% 21% "Loss of origin" due to temporary storage Port Customs is not able to issue a Movement Certificate PwC 13

15 Preferential Origin (continued) 1. What are the typical Rules of Origin? Either a 35% or 40% value-add criterion to support substantial transformation or a specific manufacturing process. 2. Does the "yarn-forward rule"rule apply? Typically no particularly in important FTA such as ACFTA. Watch out for the yarn forward rule in future FTA negotiations. 3. What to do when there is no explicit third-party invoicing rule? Reciprocity is an important consideration for the authorities. Talk with the Tariff Division (for origin) in China and take a proactive way to manage the origin benefit. 4. What is the overall trend of FTA usage for retailers? Phase One of market access is often about establishing retail outlets, training staffs and building brand awareness. Phase Two looks to take unnecessary cost out of the supply-chain and we see more companies using FTA as such. Reduced China source also spurs increased usage of FTA. PwC 14

16 Summary on managing customs compliance 1. Dutiable Value Prepare defense documentation to show arm s length pricing Check for any prescribed adjustments to the declared Transaction Price Voluntarily discuss with Customs valuation issues in order to manage risks, ensure compliance, and control the landed cost 2. Tariff Classification Translate the existing HS Codes of the exporting country/area into the corresponding China HS Code per the PRC Tariff Book Watch out for translation issues and variations in nomenclature Seek a pre-classification decision with Customs for goods where the HS Code determination is complex 3. Preferential Origin Work with Vendors to confirm origin qualification and obtain a Certificate of Origin (CoO) Proactively manage third-party invoicing, the direct shipment rule and loss of origin during temporary storage in a Regional Distribution Centre (RDC) PwC 15

17 Commodity, Inspection & Quarantine (CIQ) Compliance

18 CIQ enforcement at the Customs border General Overview Licensing Inspection Standards Customer in China Labeling Testing Exemptions PwC 17

19 What can apparel retailers expect? 100% statutory inspection Since 1 January 2011, the AQSIQ has implemented 100% statutory inspection to most of the Certificate A apparel products (HS Chapters 61 and 62) Under Chapters 61 and 62, app. 281 apparel items are subject to Certificate A" CIQ compulsory testing (physical and lab) requirements. Extended total clearance timelines Physical inspection include inspection of the product as well as labelling. When inspected, a sample must be sent for testing and be given a certificate by the local CIQ Bureau. Impacts to in-store merchandise range and therefore in-store sales Clearance time of goods can be largely affected: - Estimated time of such testing is approximately working days - CIQ registered warehouse required - Shipment planning for CIQ / non-ciq also useful PwC 18

20 Main standards for product testing and labelling GB National General Safety Technical Code for Textile Products GB Instructions for Use of Products of Consumer Interest - Part 4: Textiles and Apparel Major standard for textiles products safety testing Major standard for textiles products labelling Covers safety standards for products under different Categories: - A (infant products) - B (direct skin contact) - C (indirect skin contact) Covers the general information and content required on hangtags and permanent labels PwC 19

21 Cost Savings

22 Free Trade Agreement Network Implemented Under Negotiation Under Feasibility Hong Kong/Macau CEPA (2004) Gulf Cooperation Council India ASEAN (2004) Australia Columbia Asia-Pacific Trade Agreement (key trading partners: Korea & India) (2006) Norway TPP (?) Chile (2006) South Korea RCEP (?) Pakistan (2007) New Zealand (2008) Singapore (2009) Peru (2010) Taiwan ECFA (2010) Costa Rica (2011) Iceland (2014) Switzerland (2014) Japan and South Korea Sri Lanka PwC 21

23 Returns Commercial Issues End of season inventory No factory outlets established in China Routine or limited risk distributor Customs duty and import VAT recovery CIQ approval when re-exporting Foreign exchange controls Cost allocation Potential Solutions Certificate B has been removed under General Trade for most of apparel products First sell the products for return to overseas to an I/E agent under a VAT transaction, the I/E agent will then export the products under its own name Return Goods (Trade Mode: 4561) and General Trade (Trade Mode: 0110). Recovery of VAT Consideration for I/E Agent Costs PwC 22

24 Trade Facilitation

25 E-clearance As of August 2013, more than 130,000 Category B or above companies have signed the 3 party contract with Shanghai Customs for engaging in E-clearance, which is roughly 42% of the companies engaging in E-clearance in China. 95% of Category A or AA companies have engaged in E-clearance and among the 130,000 companies, approx. 107,000 companies were registered outside of Shanghai. For the first 8 months in 2013, over 4,100,000 shipments have been cleared through E-clearance platform by Shanghai Customs. Do you participate in e-clearance? Reduction in average Customs clearance time 10% 6% 38% 46% Yes No, I am not eligible No, I don't see the benefit Never thought about it 66% 6% 28% 1 working day 2 working days 3 working days PwC 24

26 Customs Enterprise Ranking 61% are classified as Grade A or Grade AA. What is the enterprise classification rating for your company? Enterprises are realizing the economic benefits by having a high rating. On 29 September 2012, GAC published 16 measures to promote international trade via GAC Circular [2012] No. 45. Grade B 29% 10% Don t Know Certain classification criteria has been adjusted to make it easier to: Grade A 46% Qualify for an upgrade; Have classification status restored in the case of a downgrade. 15% 0% Grade D 0% Grade C Grade AA PwC 25

27 CIQ Credit Management System Announcement effective 1 January 2014 What is the evaluation standard? What is my initial ranking? Who is responsible? How does the ranking system work? What is the preferential treatment? PwC 26

28 CIQ Credit Management System (continued) What is the ranking evaluation period and methodology? A ranking for Category "A" to "D" will generally be made based on a oneyear rating cycle and according to AQSIQ enterprises do not need to apply for Category "A" to "D". What preferential treatment is granted based on the ranking? Detailed preferential treatment is likely to vary in different regions and local CIQ should submit pilot plans on the preferential treatment for central AQSIQ review and approval. The preferential treatment will most likely be granted not only based on the ranking of the enterprises but also on the risk of the imported/exported products. Who is responsible for violations and points deductions therein? When multiple enterprises are involved, deduction will be determined on a case by case basis in terms of the corresponding enterprise s responsibility. PwC 27

29 The three ones policy One entry, separate declarations One Inspection One-time Release Customs and CIQ Cooperation Pilot in Guangdong to extend to the provinces, regions and cities of Tianjin, Shanghai, Fujian etc. Example of the benefits to the importers: Nansha Port reduced from the original 21 hours to 15 hours, and efficiency was raised by 28.4%. The averaged import cost of one company located in Guangzhou was reduced by 400 M RMB for each batch. In Shanghai WGQ port, the solid waste products are inspected by CIQ/Customs at the same place now. PwC 普华永道 28

30 China (Shanghai) Pilot Free Trade Zone (SHPFTZ) Location Waigaoqiao Free Trade Zone Waigaoqiao Bonded Logistics Park Pudong Airport Integrated Bonded Zone Yangshan Bonded Port Area Goal Vision Development Promote economic growth and become proactive in creating new trade laws Explore new trade and investment models; boost and open up the service industry; establish a free trade zone to facilitate currency exchange liberalisation for investment and trade; and to form an efficient free trade environment. In early July 2013, the overall plan for Shanghai FTPZ was passed during the State Council With its official Chinese and English name being announced recently, Shanghai FTPZ is expected to be launched on 29 September Administrative Measures on the China (Shanghai) Pilot Free Trade Zone is effective from 1 October PwC 29

31 SHPFTZ Case Sharing RDC Transaction Flows Overseas Shanghai PFTZ Supplier Customer RDC (e.g. Yangshan) Enhanced Trade Facilitation Actively facilitate the implementation of Three One policy with Customs to improve efficiency Three One refers to: one time declaration, one time inspection and one time release. Inward Goods pick up first with manifest, inbound registration later Import Goods delivery first, Customs Declaration with tax paid later Domestic China Supplier Customer Customs Registration/Declaration Inward/Outward PwC 30

32 SHPFTZ Case Sharing E-Commerce Transaction Flow Overseas Shanghai PFTZ Domestic China Supplier E-commerce platform (Kua Jing Tong) Storage at 3PL Individual Customer Preferential tax treatment? Enhanced Trade Facilitation 3PL manages the goods in the PFTZ and can post the goods to the customer via courier I/E Agent as Importer-of-Record Cross-border e-commerce platform (e.g. buyeasi.com and cooperation with usashopcn.com) Registration of a ".cn address and Internet Content Provider ("ICP") license from MIIT B2C e-commerce platform online payment provider such as Alipay, Tenpay, 99bill, UnionPay etc. Revised Consumer Rights Law in March 2014 Returns of defective or unwanted goods need to go through PFTZ export formalities. Customs Registration/Declaration Inward/Outward PwC 31

33 Summary and Q&A

34 Summary Commercial Trends 1. Increasing household income levels and consumption within the economy 2. Opening up of Tier 3 and 4 cities with regional various in cultures, tastes 3. On-line and off-line business models 4. Growing top lines but pressure on the bottom line so efficiency and productivity are key Broad Import Strategies 1. Regulatory knowledge is paramount 2. Fast changing rules for CIQ and varying interpretation for Customs 3. Engage with appropriate service providers 4. Select an appropriate business model 5. Invest in government and service provider relationships PwC

35 Thank you! 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, PricewaterhouseCoopers 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 PricewaterhouseCoopers Worldtrade Management Services (Shanghai) Co., Ltd. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers 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.