Should Shipment Delay Penalties Be Deducted from the Customs Value?

 

 

[Case Overview]

Customs authorities identified two import declarations for "palm olein" where the declared value was significantly lower than prices for identical "palm olein"goods imported by other companies during the same period. A review of supporting documentation revealed the contract stipulated a price of CNF 1,000 USD per metric ton, whereas the declared price was only CNF 995 USDper metric ton, leading to a discrepancy of 5 USD per metric ton.The importing company, Company S, explained the difference resulted from a "shipment delay penalty" clause in their contract, assessing a 0.5 percent penalty that translated to the 5 USD per metric ton deduction. The company maintained it had properly declared the actual payment amount of CNF 995USD per metric ton made to the foreign supplier.

However, pursuant to the Measures of the Customs of the People's Republic of China for Determining the Dutiable Value of Imported and Exported Goods (Order No. 213 of the General Administration of Customs of the People's Republic of China, as amended by Order No. 273), Customs authoritiesdetermined the dutiable value should be calculated based on the contract price before any penalty deductions. Consequently, the company was required to pay additional duties on the adjusted value.

[Key Analysis]

Question 1: How is the dutiable value of imported goods determined?

Pursuant to Article 24 of the Tariff Law of the People's Republic of China, the dutiable value of imported goods shall be determined on the basis of the transaction value, and the freight, the associated expenses and the insurance premiums incurred prior to the arrival and unloading of the goods at a point of entry into the territory of the People's Republic of China.

The transaction value of imported goods refers to the total payment, as adjusted under Articles 25 and 26 of the Tariff Law, made or to be made by the buyer to the seller for the goods sold for export to the People's Republic of China and for the importation thereof, including all direct or indirect ones.

Question 2: Which transport-related costs must be included in the dutiable value?

In accordance with Article 35 of the Measures of the Customs of the People's Republic of China for Determining the Dutiable Value of Imported and Exported Goods, transportation and related expenses of imports shall be computed in accordance with the expenses paid or payable by the buyer. Where it is impossible to determine the transportation and related expenses of imports, the Customs shall examine and determine in accordance with the normal transportation costs of such imports during the same period.

Therefore, for transportation and related expenses to be included in the dutiable value of the imported goods, all of the following conditions must be met: (i) they are transport-related; (ii) they are incurred prior to the arrival and unloading of the goods at a point of entry into the territory of the People's Republic of China; and (iii) they are actually paid or payable by the buyer. Costs fulfilling these criteria, such as bunker adjustment factors (BAF), pilotage, towage, and unmooring charges; demurrage incurred at a Chinese port prior to unloading; and storage costs during transit, are all to be included in the dutiable value.

Question 3: What transport-relatedcosts are excludable from the Dutiable Value?

Common excludable costs include, for instance, storage fees incurred in the exporting country after the purchase of the goods by the buyer but before shipment to China, based on the buyer's operational purposes. Such storage is considered unrelated to the transport process, does not qualify as "transportation and relativeexpenses", and should not be included in the dutiable value of the imported goods. Another example is the transportation and relative expenses associated with the return freight of China-Europe Railway Express or the inland waterway service. If these are separately listed, or if the taxpayer can allocate them based on objective, quantifiable standards and provide supporting evidence, they are not included in the dutiable value. Specifically, costs for the China-Europe Railway Express return freight refer to transportation and relative expenses incurred after the imported goods carried by the containerized, international through-rail services between China and Europe, as well as other countries participating in the Belt and Road Initiative, have arrived at and been unloaded at the designated place of importation within the People's Republic of China. Concurrently, transportation and relative expenses of inland waterway service refer to those arising from the continued movement of maritime import cargo by waterway after the goods have arrived at and been unloaded at the designated place of importation within the People's Republic of China.

Question 4: Is a "Shipment Delay Penalty" Deductible from the Customs Value?

A "shipment delay penalty" arises in bulk commodity transactions where the sales contract as agreed by both the buyer and the seller explicitly stipulates, through a vessel schedule or penalty clause, that a delay in shipment will result in a deduction from the payment. In essence, it constitutes liquidated damages for the seller's breach of contract.

When a delay of shipment occurs, triggering the contractual clause, the clause becomes effective. If the seller then itemizes a corresponding deduction on the invoice, the amount deducted shall be treated as a financial penalty for the delayed shipment, constituting compensation to the buyer for the seller's failure to ship the goods within the time stipulated in the contract. Consequently, a shipment delay penalty cannot be recognized as a deduction from the transaction value of the goods. Since it does not constitute a transport-related cost, it is not allowable as a deduction from the dutiable value of the imported goods.

[Case Implications and Guidance]

Maritime surcharges, that are transport-related and incurred prior to the arrival and unloading of goods at a point of entry into the territory of the People's Republic of China, must be included in the dutiable value of imported goods. Besides, companies are exposed to the risk of non-compliance for failing to fully declare maritime surcharges, due to protracted settlement periods and multi-party involvement in the process, which can lead to oversight, particularly when the shipment is delegated to manage by freight forwarders.Customs authorities conduct thorough examinations of all relevant trade documents, including terms of sale, price and transport clauses, and settlement invoices for freight and other associated costs. This scrutiny extends to individual invoice line items, such as shipment delay penalties, to assess their admissibility for exclusion. It is therefore imperative that companies strengthen their compliance controls for Customs valuation. In cases where the settlement of taxable surcharges is delayed, supplementary declarations must be filed promptly through designated channels, such as the voluntary disclosure procedure.

(by Min Jia from Huangpu Customs)

 

 

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