Impunity for Disclosure of Customs Tax Violations

In recent years, in order to improve the business environment, the Chinese Customs has introduced an proactive disclosure regulation in the "Regulations of the People's Republic of China on Customs Inspection" to encourage enterprises to abide by the law and to promote effective customs supervision. However, in the process of proactive disclosure, the specific standards of non-penalty under proactive disclosure are unclear, making it impossible for enterprises to reasonably predict the results of proactive disclosure. Due to the unpredictable results, enterprises rarely use the opportunity for proactive disclosure.

Recently, the General Administration of Customs issued the Public Notice 161 on Handling Proactive Disclosure of Tax-Related Violations (“the Notice”). The specific criteria for exemption from administrative penalties are as follows:

Administrative Penalties - Criteria for Exemption

The timing of disclosure is a crucial factor in ensuring impunity, which is categorized in the Notice as follows:

1. The enterprises proactively disclose to the Customs within three months from the date of the tax-related violations and actively eliminate the harmful consequences;
2. The enterprises disclose to the Customs initiatively three months after the date of the tax-related violation, and the amount of underpaid tax accounts for less than 10 per cent of the tax payable or the amount of underpaid tax is less than RMB 500,000. And the enterprises eliminate the harmful consequences actively.

It means, for cases that are actively disclosed within three months, there is no set criteria for the amount of underpaid taxes and the proportion of tax payable; and for cases disclosed after three months, the criteria for exemption from administrative penalty are stricter.

At the same time, no matter what the disclosure timing is, enterprises need to take "proactive elimination of harmful consequences" to avoid administrative penalties. "Proactive elimination of harmful consequences" include paying overdue taxes and submitting customs formalities, etc..

In addition, the Notice highlights again that if a proactively disclosing enterprise is punished by the Customs with warning or an administrative penalty of less than RMB 500,000, its enterprise credit rating by the Customs will not be affected.

Exceptional Rules on the Disclosure of Tax Violations

It should be noted that the above-mentioned exemption from administrative penalties applies only to the proactive disclosure of tax-related violations that affect tax collection.

The following cases do not fall into the scope of proactive disclosure:

1. Before the disclosure, the Customs already have clues to violations;
2. Before the disclosure, the Customs has notified the enterprise to accept the inspection;
3. The disclosure is grossly inaccurate or there are concealment of other illegal actions;
4. Violations are smuggling actions or crimes.

Our Insight

Prior to announcement of the Notice, although the principle of active disclosure was stipulated in the relevant customs regulations, the lack of specific processing standards led to different enforcement standards in various authorities. The Notice provides administrative authorities with legal basis in the execution, and with the definition of the facts it also shows enterprises how to act in such cases. At the same time, the Notice further reflects the policy trend of the Chinese Customs to guide and encourage enterprises to improve compliance initiatives.

In this context, it is suggested that multinational corporations should pay close attention to relevant customs risks and establish effective monitoring mechanisms. As a result, related risks can be detected as early as possible in order to take timely remedial measures such as active disclosure.