In the eye of the storm – how does China act and react in times of trade tension?

Since the beginning of 2018, the US government has announced a series of tariff measures directed at Chinese exports to the US. In response to the tariff measures, China has also implemented tariff measures of a similar scale and intensity directed at products originating in the US. As of the date of this article, the US has already started collecting additional tariffs on products imported into the US from China with a value exceeding $250 billion, and China has responded with additional tariffs on US goods exceeding $110 billion in value.

The tariff measures have had a huge impact on import and export enterprises in both countries. In addition, the US has just reached an agreement with Canada and Mexico on a replacement for the existing North American Free Trade Agreement (NAFTA) – the US-Mexico-Canada Agreement (USMCA). The USMCA includes a key provision which could bar its members from entering into a separate free trade agreement with any non-market economy, which has been taken to refer primarily to China. As such, commentators have suggested that the discussions between China and Canada, on a potential trade agreement between them, might well be affected. This accounts for more than 80% of China's total imports from the US.

The sources of the trade issues between China and the US could be traced to many root causes, and are expected to be difficult to completely resolve in the short- to medium-term. Indeed, at worst, the situation could evolve into a longer term, chronic trade conflict with important implications for the international trade environment. There could well be a degree of ebbing and flowing to the tensions, with alternating periods of relaxation and intensification. Uncertainty may become a 'new normal' that enterprises have to face. In light of this, enterprises need to formulate reasonable strategies that suit their businesses and sectors of operation, such as their go-global strategies, financing structures, supply chain stability analyses, tariff impact analyses, and overseas investment. This should allow them to better cope with the complex international environment and market competition.

In an effort to ameliorate the economic impact and demonstrate that China maintains an open position towards economic globalisation, the China government announced several batches of tariff reduction measures in 2018. The first batches of tariff reduction were effective from May 1 and July 1 2018 respectively, covering pharmaceutical, automotive, and consumer products. The most recent batch of tariff reductions became effective from November 1 2018, and mainly applies to industrial products, textiles and construction materials. The overall average tariff rate on imports into China is set to see a reduction to 7.5% in 2019, as compared to 9.8% last year. The anticipated increased imports will in part cater to stimulated domestic consumption, as an increasing core driver of economic resilience and growth, and in part cater to economic upgrading. It is expected that the lower tariffs will force domestic manufacturers to respond to increased competition from foreign brands, and raise their game – this is an explicit objective of the measures. In light of the US-China countervailing tariffs, it is expected that China will buy more from the EU and other Asian suppliers and this could affect how global supply chains are structured.

Separate from the China-US trade issues, China has been revamping its institutional arrangements for customs supervision. Starting from April 20 2018, the China Entry-Exit Inspection and Quarantine Authority (CIQ) has been officially consolidated as a subsidiary body of China Customs. The CIQ was previously subordinate to the General Administration of Quality Supervision, Inspection and Quarantine of the PRC (AQSIQ), which is generally responsible for the inspection of imports and exports and quarantine. This restructuring is expected to lead to substantial changes to the import declaration process and monitoring mechanism enforced by China Customs, and the associated system set-up.

In addition, China Customs has taken a more proactive approach in terms of its participation in the World Customs Organisation (WCO). In October 2017, a new customs valuation case was approved by the technical committee on customs valuation (TCCV). It was subsequently approved by the WCO Council and issued as TCCV Case Study 14.2. It is worth noting that this is the first time that China has brought a valuation case to the WCO and this particular China solution is set to become part of the global customs valuation guidelines. The case is related to the use of transfer pricing (TP) documentation in customs valuation; gross margins of similar companies were compared in the case study to determine if the transactions with related parties were conducted at arm's length. This will be described in more detail later in this chapter.

In 2018, China Customs also introduced an advance ruling regime for various customs affairs. The introduction of this regime steers relevant customs inspections, reviews and validation processes away from post-import disputes, and towards a more targeted and clearly defined administrative processes and improved efficiency on customs clearance.

Last, but not least, in March 2018, China formally issued an important regulation with regards to 'enterprise credit management', which came into force on May 1 2018. The goal of the new rules is to facilitate those that act in good faith and in compliance with laws and penalise those that lose credit and break laws. Compared to the previous customs credit management regulations, there are enhanced rewards for high credit enterprises, while stricter measures are applied to penalise discredited enterprises. This system exists in parallel with, and operates on the same principles as, the tax authority-managed taxpayer credit system. The latter awards ratings to taxpayers in terms of compliance risk, and 'good' and 'bad' behaviour, and links to these to different levels of scrutiny and preferential access treatment. For further details on this system, see the chapter, Seeing the tax trees from the data forest – how does Chinese tax administration manage in the digital age?

Since the start of 2018, the US has released a series of steadily escalated tariff measures. These have included imposing tariffs on washing machines and solar panels in January 2018, 25% tariffs on imported steel and a 10% tariff on imported aluminum products in April, on the basis of section 232 of the Trade Expansion Act of 1962 (section 232 tariff measures). Subsequently, lists of various Chinese-originating products are being subjected to additional 25% and 10% tariffs, based on section 301 of the Trade Act of 1974 (section 301 lists).

The section 232 tariff measures have been enforced for imports of steel and aluminum products into the US, generally applying to imports from all countries, with some limited exceptions. The section 301 lists, however, have been solely enforced on products originating in China. These additional 25% and 10% tariffs have started to be levied on the products covered by the lists as of July 6, August 23 and September 24 2018. The section 301 lists focus on products from the industrial sectors that contribute to or benefit from the 'Made in China 2025' industrial policy, including mainly aerospace, information and communications technology, robotics, industrial machinery, and automobile products.

Correspondingly, the Chinese government announced its retaliation against US exports into China and additional tariffs at 5%, 10% and 25% have been levied on a series of lists of items from the same dates. As of the date of this article (October 16 2018), the lists of products in Figure 1 have been affected and their status is also mentioned. It should also be noted that China has steadily increased its goods export VAT refund rates to support exporters in the face of increased tariffs.

US list (imports from China)		China list (imports from the US)
• Steel articles • Aluminum articles (23+ tariffs)	Effective from March 23/April 2 2018	• Fruit and pork • Seamless steel pipes • Recycled aluminium (128 products, $3 billion)
• Boilers, machinery and mechanical appliances • Electrical machinery • Auto, aircraft, ships and boats • Instruments and parts (818 products, $34 billion)	Effective from July 6 2018	• Agricultural products • Auto • Aquatic products (545 products, $34 billion)
• Lubricating oils/preparations • Chemicals (partial) • Iron or steel products • Electrical machinery • Railway products • Instruments and apparatus (284 products originally published, and amended to 279 products, $16 billion)	Effective from Aug 23 2018	• Chemicals (partial) • Medical equipment • Energy products (114 products originally published, and amended to 333 products, $16 billion)
• Foods • Chemicals (partial) • Textiles • Auto parts (6,000+ products, $200 billion)	Effective from September 24 2018	• Agriculture products • Foods • Chemicals (partial) • Textiles and apparel • Metal products • Machinery (5,207 products, $60 billion)

Undoubtedly, businesses operating throughout ASPAC and the wider world will see varied impacts from the trade issues between the US and China, depending on their sector, operations, and the distribution of their activities. Based on our observations, several actions can be adopted by companies whose import or export businesses are affected:

• Trade data collection: Companies need to ascertain exactly which imported products may be affected by new tariffs, and at which volumes these will kick in. Companies should organise and review their import and export data to obtain a full picture of their existing trade activities and understand the risks they face. Companies should identify and focus on their most affected products, so that compliance review and planning can be more focused and effective.

• Review to mitigate compliance risks: Additional tariffs are levied on particular tariff codes, published by the governments of the two countries, and are applicable based on the country of origin (as opposed to the country of the trading enterprise). As such, companies need to ensure that their customs reporting of tariff classifications and countries of origin are accurate. Specifically:

• Importers and exporters in China and the US should carefully review the accuracy of declared tariff codes. In the event of uncertainty, it is essential to get an understanding of the advance ruling mechanisms and judicial review in the two countries as soon as possible, to ensure the accuracy of customs declarations;

• Country of origin determinations can be challenging for certain companies due to the complex and varying rules of origin adopted by the two countries. The determination can also be complicated by fluctuations in production costs, selling prices of finished products, and the different bill of materials (BOM) components for a product. It is imperative that companies manage this action through automated processes and ensure that each determination process and result is audited and stored, to ensure that compliance risks are managed; and

• Origin marks should be displayed accurately and clearly. For example, for non-US origin goods imported into China from the US, or non-Chinese origin goods exported to the US, companies could face delays and challenges if they do not mark packages and products correctly. Certificates of origin should be applied where possible, in order to avoid obstacles in customs clearance.

• Participate actively: If it is confirmed that the tariff codes of the goods are accurate and the country of origin is confirmed, companies should have a good understanding of the possibilities for applying to government authorities in the two countries for an exclusion of their products from the additional tariffs. The US has established a formal application process, under which the office of the US trade representative (USTR) can be approached for an exclusion from the section 301 tariff measures. The Chinese government is also collecting written feedback from enterprises in selected industries and is expected to launch its own exclusion process in the near future.

• Strategic planning: With the above tasks generally considered to be short-term actions, companies are recommended to identify mid-term and long-term strategies to mitigate the impact of what might be continuing additional duty costs. For example, the US has a duty drawback regime that allows for the refund of 99% of the section 301 duties paid on goods imported into the US that are subsequently re-exported. Similarly, China has its free trade zones and processing trade regime that can be used to enjoy exemption from the duties that are payable on imports if they are to be exported, subsequent to storage or manufacturing. These regimes in both countries could substantially reduce the negative impact of the trade conflict for firms that can avail of them. In addition, a change of source for a single component of a BOM can impact the country of origin (COO) designation for a finished product. Companies can consider where to source their components, and which stages of the manufacturing should be performed in which country, by re-considering their overall supply chain and sourcing strategy. There are also various other regimes that can be considered. The US has a US goods return scheme, under which goods that were made in the US and are returned to the US may be eligible for duty-free treatment. The US also has a first sale scheme, allowing the importer to declare the 'first sale' value in a multi-tier transaction, which excludes a middleman's mark-up and other costs. China has a selective duty payment scheme, allowing manufacturers in certain special customs areas to pay duties based on finished products or raw materials. China also has an outward processing scheme, where duties are paid on the value added part only, when raw materials are sent out of China for processing.

As noted above, while China has applied countervailing tariffs to imports from the US, its general import tariff policy has 'doubled down' on opening up, with some major reductions in overall tariff levels. As a direct follow-on from a keynote speech made by Chinese President Xi Jinping at the opening ceremony of the Boao Forum for Asia (BFA) annual conference on April 10 2018, the Chinese government announced tariff reductions on a total of four batches of imported goods in 2018, including pharmaceutical products, vehicles and auto parts, daily consumer products, and building and textile products:

• On April 23 2018, the Customs Tariff Commission of the China State Council issued the announcement on the reduction of import tariffs on pharmaceutical products, Shui Wei Hui Announcement [2018] No 2 (Circular 2), which reduced interim tariff rates on pharmaceutical products to zero from May 1 2018;

• On May 22 2018, the Customs Tariff Commission of the China State Council issued the announcement on the reduction of import tariffs on automotive vehicles and parts, Shui Wei Hui Announcement [2018] No 3 (Circular 3). This reduced vehicle tariff rates for a total of 139 tariff codes (from 20% and 25%) to 15%. It also reduced auto parts tariff rates for a total of 79 tariff codes (ranging from 8% to 25%) to 6%. The relevant tariff reduction for this second batch of imported goods was effective from July 1 2018.

• Following this, the Customs Tariff Commission of the State Council further issued Shui Wei Hui Announcement [2018] No 4 (Circular 4) on May 31 2018, which substantially reduces the import tariff rate for 1,449 types of daily consumer goods. As with the second batch of products, the reduction became effective from July 1 2018.

Circular 3 and Circular 4 are in line with the president's BFA speech.

Going further, Premier Li Keqiang announced another round of tariff reductions to be effective on November 1, covering 1,585 tariff codes that include industrial products, textile products and construction materials. It is expected that the average tariff rate will be reduced to 7.5% after this round of reductions, as compared to 9.8% that was the average tariff rate in 2017.

The effect of these measures in terms of improving the framework for China cross-border business-to-consumer (B2C) e-commerce is worth noting. A series of preferential tariff and tax treatments have been introduced in this space since 2014, as detailed in the customs chapters of previous years' editions of China Looking Ahead. The latest tariff reductions go further in the direction of encouraging Chinese consumers to buy desired overseas products for import into China, rather than travelling overseas to purchase them. The effect of the tariff reductions may be particularly pronounced for clothing, electronic appliances, products for infants, and so on, which Chinese consumers are particularly inclined to buy while travelling overseas.

For the global automotive industry, the China market continues to offer huge potential, with continuing high consumer interest in foreign brands. Per official statistics, China's car sales volume had reached 28.88 million in 2017, even with the government's controls on licence plates.

The potential impact on enterprises engaging in importing and manufacturing vehicles and auto parts is considered below:

• China importers of automotive vehicles: Apart from the direct cut in the tariff costs brought about by the reduction in import tariffs, the consumption tax (essentially an excise tax) levied on goods imported will also be lowered, which is good news for vehicle importers. In addition, the contraction of the tax base for VAT purposes (through the reduction of these levies) will lead to a reduction in VAT payment obligations at the time of importing, thereby increasing the cash flow of vehicle importers. The numerical example in Figure 2 provides a snapshot of the potential change to taxes and surcharges.

• Manufacturers of automotive vehicles in China: For enterprises engaging in car manufacturing in China, there will be a reduction in the manufacturing costs due to the lower tariff costs of production parts after the tariff reduction. In view of this, manufacturers may consider increasing their purchasing of imported parts.

• Manufacturers of auto parts in China: The reduction of import tariffs on auto parts may weaken the price competitiveness of domestic manufacturers of alternative parts and components. This may in turn affect the bargaining power of domestic manufacturers of auto parts and downstream manufacturers of vehicles.

• Vehicle distributors and after-sale service providers (4S shops): Automobile retailers and repairs and maintenance (R&M) service providers may encounter pros and cons from the tariff changes. They will be able, on the one hand, to source cheaper imported automobiles and parts. At the same time, they may be pushed towards offering lower prices for end products.

• Vehicle parallel importers: China's automotive industry regulatory policies restrict the importing of vehicles. A given auto brand enterprise may only authorise one single company as its general distributor in China. However, a scheme for vehicle parallel imports has been launched on a pilot basis in selected free trade zones (FTZs) in China, under which distributors other than the general distributor can be used. The tariff reduction may have some impact on the competitiveness of parallel imported cars, but the positive aspect is that the cost of imported R&M parts and components will be decreased.

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Following the issuance of case study 14.1 in April 2016, in which TP documentation was drawn on for customs purposes, the WCO TCCV approved a new case going in a similar direction in October 2017, concerning the use of TP documentation when examining related-party transactions under Article 1.2 (a) of the agreement (case study 14.2). Case study 14.2 has already been included into the 2018 edition of the Guide to Customs Valuation and Transfer Pricing published by the WCO (2018 guide).

Covering the topic of TP and customs valuation, case study 14.2 is the second issued by the TCCV and it drew extensive attention from the public. More importantly, case study 14.2 is the first time the TCCV has approved and published a case from China Customs. Therefore, this case study can be seen as a milestone which indicates China Customs' graduation to active participation in the formulation of global customs valuation guidelines.

As a referencing document which provides guidelines on the topic of customs valuation, case study 14.2 offers an important insight into global customs valuation practice. In case study 14.2, TP documentation was used as the basis for a customs valuation in order to assess whether the transactions with related parties were at arm's length. In particular, the gross margins of comparable companies were compared to determine if the value of transactions with related parties were at arm's length.

Company ICO, located in country I, is a distributor for XCO, which engages in the design, production and distribution of luxury bags throughout the world. Company XCO is based in country X. ICO is the sole distributing agent for XCO in country I. XCO does not sell identical or similar luxury bags to unrelated buyers in country I. Thus, all luxury bags imported into country I are purchased by ICO from XCO. According to ICO's TP policy, the import price of all luxury bags was determined using the resale price method (RPM). ICO calculated the import price of luxury bags based on the resale price in country I and the targeted gross margin for the next year recommended by XCO, with the deduction of customs duties.

Based on the financial results of ICO, the company earned a gross margin of 64% in 2012. However, the TP report indicated that the inter-quartile range of gross margins earned by the eight selected comparable companies was between 35% and 46%, with a median of 43%. In other words, the import price of the bags was low relative to their onward sale price to customers in the country, meaning a low customs imposition on import. The TP policy required ICO to earn a reasonable gross margin per benchmarking study – clearly the gross margin of 64%, earned by ICO, did not fall within the inter-quartile range. When the customs authority of country I conducted a valuation audit, it determined that the import prices paid by ICO had been affected by special relationships, and did not meet arm's-length requirements.

Key facts of case study 14.2, leading to the above conclusion, were as follows:

• Since ICO, the exclusive distributor in country I, had failed to provide adequate test values, the customs authority of country I examined the circumstances surrounding the sale on the basis of TP documentation;

• When examining the import price determined under the TP method used, the customs authority in country I compared the gross margin of ICO with those of comparable companies to determine if the pricing method had been evaluated in a way that was consistent with the normal pricing practices in the industry;

• The TP benchmarking study was acceptable to the customs authority. Based on a functional analysis, there was no substantial difference between ICO and the other eight comparable companies. In addition, the products of the comparable companies were similar to those sold by ICO; and

• The gross margin earned by ICO did not fall within the inter-quartile range and ICO did not make any TP adjustments in this regard.

While the earlier case study 14.1 concerned the use of an advance pricing arrangement (APA) TP analysis report as a basis to examine whether transactions with related parties were at arm's length, the analysis in that case was carried out on the basis of operating margin levels. It used the transactional net margin method (TNMM), which draws on and is aligned with the principles adopted in general TP analysis, long used by developed countries. Case study 14.2, by contrast, focused on the use of the gross margin level, showing that the WCO technical committee is keenly focused on the concerns of all countries, especially emerging economies such as China.

With Chinese Customs paying increasing attention to TP arrangements, enterprises should consider the following:

• The TP policy of most trading companies in China is modelled on RPM or TNMM and their testing indicators are operating margins or similar financial indicators. However, due to the close attention that customs pay to gross margins, it is suggested that an analysis also be conducted on gross margins when preparing TP documentation;

• Given the implications for corporate income tax (CIT) revenue, and the potential for close tax authority scrutiny, where enterprise profit is lower than the inter-quartile range, enterprises are typically encouraged by their advisors to set out a special factor analysis (e.g. industry analysis, financial analysis and adjustments) in TP documentation for low profit cases. However, for customs, the concern would be that profits were set too high, and import prices and tariff payments consequently too low. Considering this difference in a customs valuation review, it is recommended that special circumstances be analysed as well if the profit is higher than the inter-quartile range;

• When submitting TP documentation to customs, companies should provide proper explanations regarding the nature and details of the documentation to avoid any misunderstanding of the information disclosed and methods applied; and

• It is recommended that a customs valuation report be compiled with reference to the TP documentation prepared for tax purposes. Such a report should use customs valuation language and logically present a comprehensive study by consolidating the information and materials that are required to be submitted to customs.

As part of a government organisational reform, proposed during the 13th National People's Congress, the government agency responsible for inspection and quarantine for imports and exports (commonly known as CIQ) was incorporated into the General Administration of Customs (GAC) on April 20 2018. The CIQ previously fell under the authority of the AQSIQ.

Under the integration plan, the following measures have been announced, or are expected to be implemented, and these should increase efficiency of customs clearance and reduce company costs, such as storage fees and port surcharges:

• Declarations to Customs and CIQ will no longer need to be made in separate steps and can be completed through a single-window platform;

• Customs and CIQ officers will become a single team. They will perform on-site inspections and quarantine control on imported/exported goods at the same time, to simplify the whole clearance process;

• Information required by Customs and CIQ for import and export declarations is now consolidated into a comprehensive declaration for imported/exported goods; and

• When evaluating the risk level of the goods to be imported and exported, the relevant inspection requirements that are being enforced by CIQ will be taken into consideration when setting up risk parameters in the customs system.

Detailed measures will be announced and implemented step by step, and companies should make themselves aware of the changes to the procedures for Customs and CIQ declarations.

Item	Previous taxes and surcharges		New taxes and surcharges
	Tax rate	Value	Tax rate	Value
Example of import price		100.00		100.00
Customs duty	25%	25	15%	15
Consumption tax (with cylinder volume of 2.0L to 2.5L)	9%	12.36	9%	11.37
Import VAT (from May 1 2018)	16%	21.98	16%	20.22
Total tax burden	59.34		46.59

In the seventh edition of China Looking Ahead, we introduced the modernised national customs clearance integration regime, in which the enforcement of customs administration is expected to rely more on post-clearance review and audits. With this new regime, importers and exporters are hoping to have more guidance from Customs with respect to value, tariff classification, and country of origin information that they declare.

Responding to the high demand and also as a response from the Chinese government to the agreement on trade facilitation that became effective on February 22 2017, the GAC issued the Interim Administrative Measures on Advance Rulings (General Administration of Customs Order No 236 – the Administrative Measures) on December 26 2017, which came into effect on February 1 2018. It should be noted that the advance rulings system for Customs is in effect before the parallel tax advance rulings system, which awaits the finalisation of the new Tax Collection and Administration Law, anticipated early next year.

Based on the administrative measures, foreign trade operators are allowed to apply for advance rulings in respect of tariff classifications, country of origin determinations, and dutiable value-related questions.

Applicants can apply to the customs office directly under the GAC where their companies are registered for advance rulings. They can apply three months before the scheduled importing or exporting of goods, and the responsible customs office will review and make a decision within 10 days as to whether or not the application is accepted. Once the application is accepted, an advance ruling decision will be issued within 60 days.

As a general observation, disputes arising between the customs authorities and enterprises on valuations, classifications, country of origin, and so on, have been key factors that have hindered improvements to customs clearance efficiency. Disputes may further trigger potential risks, such as customs audits, import taxes (including both customs duty and import VAT) repayments and administrative penalties. In practice, enterprises have been seeking the customs authorities' verbal opinion in advance in order to mitigate compliance risks.

However, due to the fact that the verbal opinions of customs officials are not binding and different customs officials may possibly hold different opinions on the same issue, this has not been commonly recognised as an effective approach to improve the predictability of import and export operations. With the administrative measures coming into force, the customs authorities, by means of advance ruling, can review the tariff classification and country of origin elements of dutiable value and valuation methodology before the import and export of goods, so as to reduce disagreements and improve the efficiency of customs clearance.

Based on the Provisional Administrative Measures on the Credit Management of Enterprises (Decree 225 of the GAC – Provisional Measures), in force since December 2014, the GAC divided registered enterprises into four categories.

• Advanced certified enterprises (ACEs);

• Generally certified enterprises (GCEs);

• Regular credit enterprises (RCEs); and

• Discredited enterprises (DEs).

Different levels of scrutiny and oversight, as well as varying customs administrative treatments, were applied to each.

The credit management system allows China Customs to grade companies that engage in the import and export business, and facilitates the application of varying levels of day-to-day supervision and monitoring. ACEs and GCEs are given preferential treatment, such as fewer inspections and simplified customs clearance processes. On the other hand, DEs are subject to much tighter supervision, which can substantially affect their business operations.

In March 2018, the GAC issued the Administrative Measures on Customs Credit Management of Enterprises (measures) to replace the provisional measures, which came into effect on May 1 2018. The measures provide much more clarity regarding benefits and punishments in respect of different companies. The key updates included in the measures are summarised as follows.

The preferential treatment for ACEs and GCEs as well as the strict administration measures on DEs are clarified and updated in the measures.

Preferential treatment offered for GCEs includes:

• Low average inspection rate on imports/exports (i.e. less than 50% of that on RCEs);

• Prioritised clearance treatment of imports/exports;

• Deposit amount can be decreased; and

• Other administrative treatments to be announced by the GAC.

On top of the preferential treatment applied to GCEs, ACEs will also enjoy the following administrative measures:

• Low average inspection rate on imports/exports (i.e. less than 20% of that on RCEs);

• ACEs can apply to customs for deposit exemption;

• Reduced frequency of customs audits and post-reviews;

• ACEs can declare exports before the goods have arrived at the customs supervision area;

• Assignment of a dedicated liaison officer;

• Preferential clearance benefits granted through the authorised economic operator (AEO) mutual recognition arrangements with China;

• Joint incentive measures granted by other governmental authorities (please refer to the 2016 edition for details);

• Prioritised clearance treatment once international trade is resumed following termination caused by force majeure; and

• Other administrative treatments to be announced by the GAC.

The conditions for downgrading to DE credit status are adjusted in the measures. For example:

• Enterprises that cannot be located or liaised with, and which have been included on the list of enterprises with abnormal credit information for more than 90 days, will be downgraded to DEs; and

• While under the provisional measures, a company would be downgraded to a DE if penalties incurred in one year exceeded RMB 100,000 ($14,500), on more than one occasion, this provision was revoked under the measures.

In addition, under the provisional measures, DEs could not be upgraded to RCEs within one year following their downgrading. The above time limit is extended to two years in the measures.

In a nutshell, the measures pay more attention to the principle of facilitating those that act in good faith and in compliance with laws and penalising those that lose credit and act against the law. Compared with the provisional measures, one of the main improvements is that joint incentives and punishments, implemented by various authorities, are embedded in the measures. This shows that the Chinese government is putting more emphasis on enhancement of a comprehensive credit system. Additionally, the management measures applied for enterprises with different customs credit ratings are more specific and the gaps are widened.

Thus, credit status is increasingly important for Chinese enterprises, given that various authorities are now granting more preferential treatment to enterprises with higher credit ratings and imposing stricter treatment on those with poor credit ratings.

Eric Zhou

Partner, Tax KPMG China 8th Floor, Tower E2, Oriental Plaza 1 East Chang An Avenue Beijing 100738, China Tel: +86 10 8508 7610 ec.zhou@kpmg.com Eric Zhou worked for China customs for more than nine years before joining KPMG China in 2004, where he is now the national leader of the trade and customs practice. Eric specialises in cross-border trade and customs advisory/defence services such as harmonised system (HS) code determination, customs valuation and processing trade management concerning multinational enterprises in industrial markets and consumer markets. He also has extensive experience of corporate income tax, indirect tax and transfer pricing, the latter of which are closely linked to customs valuation. Eric is a Chartered Tax Adviser (CTA) of the Chartered Institute of Taxation in China and is a member of the Association of Chartered Certified Accountants (ACCA).

Kevin Kang

Chief Economist KPMG China 8th Floor, KPMG Tower, Oriental Plaza 1 East Chang An Avenue Beijing, 100738, China Tel: +86 10 8508 7198 k.kang@kpmg.com Kevin Kang is the chief economist of KPMG China. His research focuses on a broad range of economic and social issues. He is an expert on China's economic development, government policies, business strategy, emerging technologies, and cross-border investment and mergers and acquisitions (M&As). His research helps companies navigate an increasingly complex business environment and stay ahead of the curve. Prior to joining KPMG, Kevin was the chief economist for Asia Pacific at Caterpillar, the world's largest construction and mining equipment manufacturer. He was responsible for Caterpillar's economic research and industry forecast in the Asia Pacific region. Before Caterpillar, Kevin also worked as a senior economist at Eaton Corporation, a multinational diversified industrial company. Kevin was in charge of its Asia Pacific economic research and the worldwide vehicle industry forecast. He also worked as an economist at the RAND Corporation and as a chief researcher at Samsung Economic Research Institute in China. Kevin received his PhD in economics from the Wharton School of the University of Pennsylvania and his BA in international economics from the Peking University.

Rachel Tao

Director, Tax KPMG China 26th Floor, Plaza 66 Tower II 1266 Nanjing West Road Shanghai 200040, China Tel: +86 (21) 2212 3473 rachel.tao@kpmg.com Rachel Tao has been actively involved in a wide range of customs projects, assisting clients in advisory and defence cases in connection with import and export operations from a trade compliance perspective. Rachel is specialised in various trade and customs aspects, including customs valuation and tariff classification, utilisation of special trade programmes and trade zones and assisting companies with reviewing, auditing and assessing import and export operations. In particular, Rachel has worked for many clients facing various enquiries and investigations of the authorities as regards their import and export practices, and helping them to achieve favourable outcomes. Rachel has served clients in various industries. Her major clients include importers and manufacturers of consumer, electronics, pharmaceutical and automotive products.

Philip Xia

Director, Tax KPMG China 21th Floor, CTF Finance Centre 6 Zhujiang East Road Zhujiang New Town Guangzhou, China Tel: +86 (20) 3813 8683 philip.xia@kpmg.com Philip Xia worked with China Customs from 1999 to 2007. He served as a team leader in processing trade management at the Huangpu Customs where he handled various issues regarding customs handbooks and bonded operations. He also provided customs and trade related suggestions to the Chinese negotiating group of the World Trade Organisation trade facilitation agreement as a senior specialist of the General Administration of Customs. Philip joined KPMG in 2007, and has since been actively involved in a wide range of customs and trade projects. He has advised multinational and Chinese clients on audit defence, compliance review, internal control and cost-saving opportunities. Specifically, Philip assisted many clients on customs authorised economic operator (AEO) review, bonded inventory issues, royalty and import valuation, harmonised system (HS) code classification, country of origin and free trade agreements, bonded zones and e-commerce, cross border supply chain duty/tax optimisation, etc. Philip's clients include Chinese and foreign invested enterprises in the machinery, aeroplane maintenance/repair, auto and parts, electronics, chemicals, consumer goods, and food industries. Philip holds a bachelor's degree in economics, with a major in finance, from Wuhan University.