China Customs Issues Significant Revision to the Enterprise Credit Management System

Introduction

China Customs introduced a classification system for enterprises based on the compliance records of trading entities as far back as the 1980s. This system was substantially revamped with effect from 1 December 2014 pursuant GAC Order No. 225, which conformed China’s existing enterprise credit rating system with the international Authorised Economic Operator (“AEO”) programs in place internationally.  Order 237 formalises many of the provisions of the Interim Measures announced under the previous Order 225 of 2014 and goes further in many respects.  Nevertheless, Order 237 continues to classify al trading enterprises in under the AEO classification structure as follows:

Certified Enterprises	Advanced Certified Companies
	General Certified Companies
General Credit Enterprises
Dishonest or Discredited Enterprises

Summary of Order 237

Inter-Government Agency Information Sharing and Enforcement Cooperation

Whilst the intention and direction for information sharing amongst Chinese government agencies was provided for under the now repealed Order 225, this latest notice formalises and structures this cooperative effort.  Specifically, Article 4 of Order 237 provides for the so called “3 mutuals” referring to the mutual cooperation amongst Chinese government agencies with respect to information sharing, supervision of enterprises, and cooperation in enforcement efforts.  In addition, China Customs has affirmed, under Article 5, that it will continue to extend mutual recognition efforts of other countries’ AEO status under its own Enterprise Credit Rating system and will likewise extend its “3 mutuals” principal with such international customs authorities with which it has a memorandum of understanding.

Information Collection

Under Article 6, China Customs may collect the following information in order to inform its credit rating determination:

1. Basic corporate information including the legal representative, senior executive staff and personnel of the enterprise involved in day-to-day import and export operations;
2. Import and export records as well as corporate information related to the company’s import and export operations;
3. Enterprise administrative licensing information;
4. Information on administrative penalties and criminal penalties assessed to the enterprise and any related personnel;
5. Incentive programs or enforcement measures of other Chinese government agencies related to the enterprise;
6. AEO mutual recognition information from an international customs authority; and
7. Any other information deemed to be relevant by China Customs to the credit rating of the enterprise.

It is clear from the above that information regarding approved foreign invested projects with duty and import VAT incentives, possibly tax information and compliance records, and potentially even product regulatory compliance details may now be more readily accessible to customs and other Chinese government agencies.  As a result, critical supply chain operations of multinational companies in China may be impacted as a result of otherwise unrelated compliance concerns. As a result, we encourage our clients to take a broad view in reviewing their internal compliance going forward so that the risk of such operational disruption is minimized.

Annual Credit Report

Of significance in order 237 is the provision that enterprises submit an annual report of relevant customs credit information.  This so called “Corporate Credit Information Annual Report” will be submitted through a yet to be established information management system, the creation of which is provided for under Article 7 of this Order.  These reports will be filed between 1 January and 30 June each year.  If a company fails to submit its annual report or where the registered address cannot be verified by customs and the enterprise cannot be contacted by China Customs, the company may be listed on the “Abnormal Credit Information List”.  Inclusion on this list will prevent an enterprise from seeking or obtaining an upgrade to a higher certification level.

Public Access to Information

Order 237 provides for the implementation of an information management system whereby China Customs will make available to the public the following enterprise credit rating information:

1. The China Customs credit rating of the enterprise;
2. Details of the enterprise’s administrative license to import and export;
3. Information as to any administrative penalties imposed by China Customs on the company within the past 5 years;
4. Incentive programs or enforcement actions of other Chinese government agencies under which the enterprise is operating;
5. A list of companies with abnormal customs credit information as discussed above;
6. Any other information that should be publicised according to law.

Rights of Appeal of Credit Rating Determination

Should an enterprise take exception with its enterprise credit rating or believe it to be based upon inaccurate information, it may submit an appeal to such determination with sufficient detail to support its claim.  Customs will then review and make its determination in response to such requests within 20 days of submission.

Credit Rating Details:

The following are the basic qualification criteria and other considerations for each credit rating level as provided for under Chapter 3 of Order 237:

Certified Enterprises	Advanced Certified Companies	As with General Certified Companies, this credit rating may only be obtained by affirmative application and verification. Companies that have obtained Advanced Certification status must re-certify once in every 3 year period. China Customs will send notification to the Advanced Certified Company prior to initiating the recertification review. Should the company be downgraded as a result of the review, Customs will issue a formal determination of the adjustment of the credit rating, which downgrade will become effective on the date of service of such notice. If a company applies to abandon the re-certification review, it is deemed to have failed the review and a downgrade will be issued.
	General Certified Companies	An enterprise must affirmatively make application to China Customs in order to be a Certified Enterprise. Within 90 days of receiving the application and extendable by an additional 30 days, China Customs will make its final determination on the enterprise’s credit status. Those companies that fail to pass the certification may not reapply for one year. During the period of applying for certification, if the enterprise is involved in an investigation or an investigation of an alleged smuggling offense, China Customs will terminate the certification application. Similarly, where a company that has made application for certification is under review for a violation of Customs supervision conditions shall have it application suspended for up to 3 months, at which point the company is either cleared in the investigation or its application will also be terminated. A General Credit Enterprise that was previously a General Certified Company can reapply for Certified status after one year. Likewise, if an Advanced Certified Company is downgraded to a General Certified Company, it may not reapply for an upgrade for one year.
General Credit Enterprises	A newly-established enterprise or companies first registered with custom will be considered General Credit Enterprises; Enterprises that do not meet the requirements of certification or re-certification as Certified Enterprises but have not had smuggling or administrative penalties sufficient for a rating as a Dishonest Enterprise will also be considered as General Credit Enterprises. Enterprises that were previously rated as Dishonest Enterprises but have since been operating in a compliant fashion for two consecutive years.
Dishonest or Discredited Enterprises	Enterprises that have committed smuggling or engaged in smuggling activities, which are defined as: a. Enterprises that have violated customs supervision and have been assessed administrative penalties of more than RMB1 million; b. Inaccurate declarations in excess of those discovered in the previous year and for which the accumulated customs penalties within that year exceed RMB300,000; c. Underpayment of duties or fines and penalties. In such circumstances where the arrearages exceed 90 days, China Customs will also list the company on its public Credit Information Management System on the Abnormal Credit list; d. Taking unfair advantage on the guise of the Customs or other enterprises; and e. Making false or misleading submissions to customs in order to influence the enterprise credit rating; In serious cases where the enterprise fails to cooperate with China Customs; A criminal violation determined by another government agency that impacts the China Customs credit rating under the “3mutuals” concept; and Any other circumstances as prescribed by China Customs.

Operational Impact of Credit Rating Status

The following highlights some of the significant benefits or burdens of the various credit rating status levels assigned to trading enterprises as provided for under Chapter 4 Articles 23 – 25 of Order 237.

Advanced Certified Companies

1. Inspection rate of less than 20% of the average inspection rate applied to General Certified Companies;
2. A potential Exemption from providing any guarantees for import duties and VAT;
3. Reduction in the verification and inspection of the enterprise;
4. Advanced Declarations for goods destined to customs supervised zone
5. Customs account management;
6. Mutual recognition of AEO status between countries with an AEO MOU in place with China;
7. Join Incentives for trustworthy enterprises as provided by other Chinese Government Agencies;
8. Priority clearance after the resumption of operations following a force majeure incident;
9. Any other benefits as later announced by China Customs.

General Certified Companies

1. Inspection Rate of less than 50% of that applied to General Credit Companies;
2. Customs Priority clearance;
3. Ability to post a bond for duties and import VAT;
4. Other benefits as provided for by China Customs.

Dishonest or Discredited Companies

1. Average inspection rate of goods shall be in excess of 80%;
2. Will not be able to take advantage of any deferral or relief measures for the payment of duties and VAT at the time of import or other summary declaration efficiencies;
3. Must provide a full guarantee for all inputs under a processing trade business;
4. Will be subject to increased business inspection and verification frequency;
5. May be subject to additional disciplinary measures as determined by other Chinese governmental agencies;
6. Other administrative measures prescribed by China Customs.

Mergers, Acquisitions, and Spin-Offs

Where a company has been split or spun-off from a company with a valid credit rating, and the company with the valid credit rating survives following the split, the newly formed company shall be deemed to continue to be one and the same for the purposes of the Enterprise Credit Rating System.  However, where the original entity with the valid credit rating is dissolved or otherwise ceases to operate, the newly formed entity following the split shall be regarded as a newly registered entity and will therefore be assessed a General Credit Rating regardless of the credit rating of the original entity prior to the split.

Where a company is acquired by another, it is the credit rating of the surviving entity that shall apply to the newly combined enterprise.  However, where two companies merge into an entirely new corporate entity, the new entity shall be regarded as such and be assigned a General Credit rating regardless of the status of the legacy entities.

Professional Opinions

Finally, it is interesting that China Customs contemplates the complexities of such credit ratings and the possible variations in interpretation and application of this Order.  As such, the Order contemplates professional opinions on issues relating to the enterprise credit rating.  It is unclear how such professional opinions may be utilized but presumably they may be used in support of appeals to determinations, in analysis of the impact of credit ratings on planned merger and acquisition transactions, and for upgrade applications.