China tax alert. Background. Issue 4 June 2018

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1 Regulation Interpretation Cooperation China tax alert Issue 4 June 2018 China Customs Credit Management System Becoming Complete and Mature Formal Implementation of Measures of the Customs for the Administration of Enterprise Credit Background On May 1, 2018, Measures of the Customs of the People's Republic of China for the Administration of Enterprise Credit (Order of the General Administration of Customs No.237, hereafter referred to as the Credit Measures) came into effect. The Credit Measures took place of the Interim Measures of the Customs of the People's Republic of China for the Administration of Enterprise Credit (Order of the General Administration of Customs of the People's Republic of China No.225, hereafter referred to as the Interim Measures) which was implemented in December Inheriting the original Enterprise Credit Management System, the Credit Measures has been improved based on the problems and experience from the validity period of the Interim Measures to meet the need of further supervision, hence establishing a new credit centered Customs supervision system. China tax bulletin 1

2 Credit Management Measures for Authorized Enterprises In light of the credit status of the enterprises registered and filed with the Customs, The Credit Measures divided the enterprises into four levels, i.e., Advanced Authorized, General Authorized, General Credit and Dishonest Enterprises, corresponding to different credit management measures respectively. The most attractive parts in this Credit Measures is that it further increased and clarified the multiple credit management measures for the authorized enterprises, further benefiting the enterprises with high credit, thus fully presenting the principles that Facilitating enterprises with good credit and complying with laws while punishing those with bad credit and violating laws. The following benefits are available to the Advanced Authorized Enterprises and the General Authorized Enterprises. Advanced Authorized Enterprises The average inspection rate for imported and exported goods below 20% of that for general credit enterprises; Priority in handling the Customs clearance formalities for imported and exported goods; Application for being exempt from guarantee to the Customs; Reduction in frequency of enterprise check or inspection; Making declarations to the Customs before exported goods are shipped to the Customs supervision zone; Designation of coordinators by the Customs for enterprises; Measures for clearance facilitation provided by the Customs in the countries or regions with mutual recognition of AEO; Measures for incentives jointly provided by the relevant departments of the State for enterprises with good credit; Priority in Customs clearance for recovered international trade after the interruption due to any force majeure; and Other administrative measures specified by the GAC. General Authorized Enterprises The average inspection rate for imported and exported goods below 50% of that for general credit enterprises; Priority in handling the Customs clearance formalities for imported and exported goods; Guaranteed amount charged by the Customs below the total amount of taxes they may bear or the amount specified by the General Administration of Customs ( GAC ); and Other administrative measures specified by the GAC. The comparison reveals that the credit management measures for advanced authorized enterprises are more abundant and specific, its range and strength is far more than those for general authorized enterprises, which reflects that the administrators intend to expand the measure gap among different credit levels, thus guiding more import and export enterprises to apply for advanced certification and cultivating a batch of exemplary benchmarking enterprises in foreign trade. With huge significance, the two institutional measures provide more gold content to the advanced authorized enterprises with potential value-added space : Measures for clearance facilitation provided by the Customs in the countries or regions with mutual recognition of AEO The enterprise credit management system of China Customs does not develop in isolation, but connects itself to the rule of World Customs Organization (WCO) to help enterprises with high credit go to the world stage. On Oct 26, 2017, World Customs Organization Implementation Guide for Mutual Recognition of Authorized Economic Operators (AEO) drafted by China Customs was adopted in the WCO working group meeting on the Framework of Standards to Secure and Facilitate Global Trade, which greatly improved the international discourse power of China Customs. Currently, China has reached mutual recognition of AEO with 35 countries or regions, including EU, Hong Kong, Singapore, South Korea, Switzerland, New Zealand, Israel, Australia, etc. According to the statistics, when the goods of China AEO enterprises are exported to the above-mentioned countries or regions, the inspection rate reduces by 60-80%, and the time and cost needed for Customs clearance reduces by more than 50%. Therefore, overseas trade partners are paying more attention on the AEO certification, which has become a "pass" for the import and export enterprises to go to the world stage. Measures for incentives jointly provided by the relevant departments of the State for enterprises with good credit Customs enterprise credit management system is not the statements of only Customs. Honesty and compliance are the consensus of all administrative departments in the country. In order to carry out the relevant requirements for the construction of the national social credit system, as of last July, more than 60 government departments of the state had signed 25 joint incentives and disciplinary

3 memorandums, and made more than 100 joint rewards and punishment measures, which realized the linkage of rewards and punishments across regions, departments and industries, leading to more significant exemplary and guiding effects. The enterprises credit rating by Customs is increasingly appearing in the regulations of State Administration of Taxation as well as State Administration of Foreign Exchange, and has become an important evaluation index. It can be foreseen that in the near future much more departments will introduce the benefit measures for the authorized enterprises. Performing good credit management will not only be beneficial to the import and export business of the enterprises, but also significantly push forward other operation and management activities. Certification Criteria Although becoming authorized enterprises will bring many benefits to import and export enterprises, it is not easy for them to obtain the certification. Enterprises must check and rectify themselves according to the relevant standards released by the GAC, and pass the review of the Customs before obtaining the certification. It is noteworthy that, although the Credit Measures has come into effect since May 1st, in light of the Announcement about the Implementation on the Related Matters of Measures of the Customs of the People's Republic of China for the Administration of Enterprise Credit and relevant supporting system ( Announcement of the General Administration of Customs [2018] No.32), the certification standard of the new Credit Measures temporarily will continue taking The Standards of the Customs for Enterprises Certification (Announcement of the General Administration of Customs [2014] No.82, hereafter referred to as Certification Standards) corresponding to the Interim Measures. Certification standards designed two sets of scoring standards for advanced authorized enterprises and general authorized enterprises, which all covered five parts, including Internal Control, Financial Status, Compliance, Trade Safety, and additional standards. In the future, the GAC is still likely to revise the Certification Standards on the basis of the new Credit Measures, with the principle to follow the "1+N" model, which means the general standards on all the enterprises and different standards on various types of enterprises, including the import and export consignor and consignee, the Customs declaration enterprise, the express operator, the cross-border e-commerce business, foreign trade comprehensive service enterprise, etc. The Certification Standards is based on fine classification, thus being more scientific and objective, and practical to the enterprises. Application for Certification and Post- Certification Management While the Credit Measures is releasing more institutional profits, it is gradually forming the concept of strengthening supervision. There is an idea of strict supervision lying everywhere from the application of certification to the post-certification management. For instance, where an enterprise is suspected of smuggling or violating the supervision provisions during the application for certification, Customs will terminate the certification; where an enterprise is audited or inspected, Customs may suspend the certification. In case that the suspension period exceeds three months, the enterprise will also face the consequence of terminating the certification. At present, the whole country has implemented the integrated Customs clearance, and the Customs will further strengthen the post-inspection or audit. Enterprises which intend to apply for certification can only avoid the adverse effects brought by the mentioned matters to the maximum extent by maintaining the compliance of import and export business. Even if there is a case of inspection or audit, enterprises should actively cooperate with the Customs to settle the case as soon as possible. After obtaining the authorized qualification, the Customs will also carry out re-certification of authorized enterprises on a regular or irregular basis, and an enterprise will be adjusted the credit rating in real time once it fails to meet the certification criteria. If the credit rating is lowered, there is a certain cooling period : Where an advanced authorized enterprise is adjusted to be a general authorized enterprise, it shall not apply for an advanced authorized enterprise within one year; Where an advanced authorized enterprise or a general authorized enterprise is adjusted to be a general credit enterprise, it shall not apply for an authorized enterprise within one year; Where an advanced authorized enterprise or a general authorized enterprise is adjusted to be a dishonest enterprise, it shall not apply for a general credit enterprise within two years; and Only a dishonest enterprise has been adjusted to be a general credit enterprise for one year can apply for an authorized enterprise. It can be seen that enterprises with the authorized qualification cannot relax forever, but keep abide by the law and comply with the certification standards, particularly, avoid the credit rating being degraded caused by negligence. Compared to the

4 Interim Measures, Credit Measures has added or extended the cooling period that is applicable to the downgrading of credit rating, it further reflects the strength of punishment, and thus greatly increases the dishonest costs of the enterprise; on the contrary, it also fully proves the difficulties to obtain authorized qualification. It can be predicted that with the deepening of the national social credit system, the Customs credit management system will become more complete and mature in the future, and its supervision focus will gradually shift from admission to maintenance, that is, using various means to supervise and require authorized enterprises to keep their promises continually and create a global environment of compliance and trust. Grant Thornton Observation Since the Interim Measures preliminarily established the enterprise credit management system, various government departments have gradually carried out joint rewards and punishments, which are reflected in various policies and regulations. At the same time, the GAC is also making every effort to promote AEO mutual recognition with other major economies under the rules and framework of WCO, which helped authorized enterprises become the backbone of international trade. The new Credit Measures aims to guide enterprises to be a high credit economic operator by setting more preferential management measures for authorized enterprises and limitations for dishonest enterprises respectively under the background of a more complete and mature credit management system. We recommend that enterprises carry out the work from the following aspects: Self-assessment and Early-rectification It is not possible to become an authorized enterprise suddenly. Enterprises should conduct self-assessment against certification criteria as soon as possible, especially, it is necessary to early understand and rectify some compulsory financial indicators and the compliance standards. At the same time, enterprises should actively review the business processes, improve the organizational structure and regulations, and even update some of the hardware and software facilities, to fully get prepared for the on-site inspections. and carefully keep the records for inspection. In particular, enterprises directly transferred to the authorized enterprises from the Customs enterprise management classification under the old system have not undergone the process of selfassessment and rectification under the new standards, as a result, they are not familiar with the Customs enterprise credit management system and the certification criteria. If those enterprises would like to maintain the authorized qualification, they must pick up for the weakness as soon as possible to have a good sense of the criteria as well as get prepared for recertification of the Customs. Self-cultivation and Win-win Cooperation In practice, normal import and export enterprises will entrust logistics partners to engage in import and export activities, and the Customs will adopt the credit management measures based on the principle of Lower First to determine the applicable credit ratings. Therefore, enterprises with lower credit rating cannot enjoy the facilitations of import and export by entrusting logistics partners with higher credit rating but only by improving their credit rating can they obtain relevant facilitations. Conversely, enterprises with higher credit rating need to pay constant attention to the credit conditions of logistics partners. Entrusting partners with the same high credit rating can realize a win-win cooperation and fully enjoy the preferential measures by high credit enterprises. Grant Thornton has extensive experience in the review of enterprise credit certification and internal control systems, which can assist enterprises in self-assessment of AEO certification criteria, identify existing differences and potential risks, and then put forward rectification measures. For the import and export control where many enterprises feel weak in the certification practice, Grant Thornton can help these enterprises establish or improve the corresponding internal control system, and form a long-term effective mechanism with high compliance and efficiency in order to prevent risks, keep compliance, and obtain qualification of authorized enterprises as early as possible. Regular Review and Know the Score Enterprises obtained the certification qualification should not have an attitude to relax forever. As for the requirements of regular or irregular re-certification of the Customs, enterprises should make regular internal review, keep it at all times

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