Fashion and Apparel Retailers: Managing Trade Compliance in Asia9 April 2015

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PwC

PwC R&C Service Team

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Customs & International Trade

Damon PalingPartnerPwC ShanghaiEmail : damon.ross.paling@cn.pwc.comTel: +86 21 2323 2877Fax: +86 21 2323 8800

Transfer Pricing Services

Paul TangDirectorPwC ShanghaiEmail : paul.tang@cn.pwc.comTel: +86 21 2323 3756Fax: +86 21 2323 8800

Corporate Tax

Jane WangPartnerPwC ShanghaiEmail : jane.y.wang@cn.pwc.comTel: +86 21 2323 2896Fax: +86 21 2323 8800

PwC

Overview of Key Messages

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Asia Pacific is and will continue to take the leading position for GDP growth and global retail sales volume.

Customs regulations and practices remain challenging and less transparent compared to Western countries. Some authorities are aggressive due to revenue driven environments.

Key areas of scrutiny for retail and fashion companies include both tariff (e.g. customs valuation, especially related party transaction and royalty payments) and non-tariff measures (e.g. licensing and labelling requirement).

Duty saving opportunities can be realized through utilizing FTAs. Bonded Asia distribution centers are feasible. Supply chain efficiency can be improved through ensuring perfect documentation and joining country-specific trade facilitation programs.

Regulations and policies relating to e-commerce are under rapid reform as Governments attempt to keep up to pace with e-commerce market developments in the region.

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Part 1

Asia is growing at 10%, led by China, fast fashion and e-commerce

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PwC

Global Retail Sales Volume Growth (% pa)

-2

0

2

4

6

8

10

2011 2012 2013 2014 2015 2016 2017 2018

Asia & Australasia (inclJapan)

Latin America

Middle East & North Africa

North America

Transition economies

Western Europe

World

5

Source: Economist Intelligence UnitFigures for 2014 onwards are forecasts. Prior years are actuals or estimates.

%

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Global Retail Sales (US$ trillion)

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016 2017 2018

Asia & Australasia (inclJapan)

Latin America

Middle East & North Africa

North America

Transition economies

Western Europe

World

6

Source: Economist Intelligence UnitFigures for 2014 onwards are forecasts. Prior years are actuals or estimates.

$ trillion

PwC

Outlook for Asian Fashion & Apparel Market

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Key Findings

• Expansion: Fast fashion houses are expanding aggressively across Asia with average expenditure on clothing set to rise by almost 10% per year.

• Forecast: By 2018 market demand for clothing in the region is set to reach almost US$340 billion in nominal US dollar terms.

• China: By 2018 China will account for almost one-third of regional demand for clothing.

Key Findings

• Growth: Asia, notably China, will continue to drive global growth in e-commerce.

• India: 2015 is likely to be India’s year for e-commerce stories as regulation eases and the likes of Flipkart and Snapdeal drive growth.

• China: Alibaba’s dominance in China will make it difficult for foreign e-tailers to penetrate and the Chinese firm will be increasingly acquisitive abroad.

Online Retailing

Fashion and Apparel

Source: PwC 2015-16 Outlook for the Retail and Consumer Products Sector in Asia

PwC

Part 2

What are the trade compliance strategic priorities in 2015?

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PwC

China Case Study: 2015 Priorities

1. Cost Saving 2. Compliance Management

3. Technology and Automation

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Source: 2015 PwC China Q1 Survey

PwC

Regional Extrapolation

Market MFN Duty Rate*

Tariff Measures

Non-tariff Measures

Post-entry Audits

Trade Facilitation

Japan 12%

S. Korea 13%**

China 14%

Hong Kong 0%

Taiwan 12%

Malaysia 0%-30%

Thailand 30%

Vietnam 20%

Note: *The MFN duty rate indicated shows the average duty rate for apparel products only.**In Korea, basic rate (i.e. 13%) prevails automatically when it is lower than the MFN rate.

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Part 3

Managing customs duty costs

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Overview

Customs Valuation

Tariff Classification

Country of Origin

PwC

Overview Drivers of customs duty costs

Dutiable Value

Tariff Classification

Country of Origin

• Customs valuation defence documentation• Adjustments to declared Transaction Price• Voluntary discussion with Customs

• Export HS Code translation into local HS Code• Translation issues and variations in

nomenclature• Pre-classification decision with Customs/

licensed brokers

• Certificate of Origin (“CoO”)for duty saving• third-party invoicing, direct shipment rule and

‘loss of origin’ for temporary storage in a Regional Distribution Centre (RDC)

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Customs ValuationWhat are the greatest risk areas?

38%

31%

0%0%8%

23%0%

2015 PwC China Q1 Survey: Which of your customs valuation issues have been previously audited or investigated?

Arm's length pricing

Royalty fees

Other (e.g. commission, warranty etc.)

Freight and insurance

Tooling assist, packaging costs etc.

Not challenged on Customs Valuation

Bonded warehousing and logistics costs

The following aspects are considered by Customs during valuation:

• Arm’s length pricing• Royalty fees• Freight and insurance• Tooling assist, packaging costs etc.• Bonded warehousing and logistics costs• Other (e.g. commission, warranty etc.)

Can royalty arrangements be structured as non-dutiable? What if retail companies have their own brands?

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Customs Valuation: What is the conflict between TP and customs valuation?

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Tax Bureau

• Follows the OECD transfer pricing rules

• Minimise the import price to generate maximum inland profit, and thus maximise corporate income tax

• Focus on a net margin, rather than a gross margin level

• Collected annually so concerned with annual position

Customs

• Maximise the import price to generate maximum customs duty and import VAT

• Assess arm’s length pricing at a transaction level (rather than entity level)

•Focus on a gross margin, rather than net margin level

•May also include intangible items in the dutiable value

•Collect per import so concerned with value of individual transaction at time of import

PwC

Frequently Asked QuestionsWhat is the correct dutiable value for the imported goods?

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Q&A1. Should I include a trademark royalty in the dutiable value?

Can I exclude a ‘signage fee’ from the dutiable value?

2. Are transfer pricing adjustments, retrospective or prospective, feasible? What about different import values depending on the distribution channel?

3. Should I provide a copy of my Transfer Pricing Documentation (TPD) to Customs?

4. If a market in Asia is under performing, can I reduce the inter-company transfer price of the imported merchandise?

5. What is the impact of Customs ‘price reference database’ on my supply-chain continuity and compliance?

6. In which country can I secure a written ruling from Customs on the dutiable value?

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Tariff ClassificationHow to go from global to local?

Whether a global classification system can be used is frequently asked but it can only be answered case-by-case. The general ‘pros’ and ‘cons’ of this approach are summarised as follows:

Pros Cons

• Strengthen internal controls

• Reduce errors by Customs Brokers or staff who lack in-depth product knowledge

• Classification accepted by other countries may be used as support in the event of dispute with Customs

• Consistency provides certainty

• Overcoming resistance to foreign practice

• Overcoming resistance to change

• Customs can still disagree on the classification

• May not result in a most duty-advantaged position in the tariff

Common pitfalls in tariff classification also include discrepancies between supplier documents, import licenses, and product meaning distortions after product description translation. One should not assume that global tariff classifications will always work in country.

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PwC

Frequently Asked QuestionsWhat is the correct tariff classification (HS Code) for the imported merchandise?

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Q&A1. As a general strategy, are retail companies securing written

tariff classification rulings?

2. Should I include the HS Code on the commercial invoice and/or other documentation?

3. What is the relationship between the HS Code and the product labelling and inspection requirements?

4. In a large country such as China, how to manage inconsistent interpretation of tariff codes at different port Customs?

5. Is it true that the local Customs Broker may “group” HS Code in order to fast-track Customs clearance? Does this practice violate the rules and result in duty underpayments?

6. How relevant are HS codes on exports?

PwC

Country of OriginWhat FTA Opportunities are available for you?

Sourcing Countries

China ASEAN APTA Sri Lanka Turkey MoroccoImporting Countries

JapanChina-Korea-Japan

RCEP

ASEAN-JapanEPA (Indonesia, Malaysia,

Philippines, Singapore, Thailand, Vietnam,

Brunei)

N/A N/A N/A N/A

RCEP

S. Korea

APTAASEAN-Korea

CECAKorea - Singapore

APTA APTA N/A N/AChina-Korea

Korea – VietnamRCEP

China-Korea-JapanRCEP

China N/A

ASEAN-ChinaChina – Singapore APTA

APTAN/A N/A

RCEP China-Sri Lanka

Hong Kong CEPA ASEAN - HK N/A N/A N/A N/A

Taiwan ECFA N/A N/A N/A N/A N/A

MalaysiaASEAN-China ATIGA

N/A N/A N/A N/ARCEP RCEP

ThailandASEAN-China ATIGA

N/A N/A N/A N/ARCEP RCEP

VietnamASEAN-China ATIGA

N/A N/A N/A N/ARCEP RCEP

Not Applicable

Entered into Force

Signed but not in force

Under Negotiation/

Consideration

1. ASEAN: Association of Southeast Asian Nations (10 ASEAN countries - Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, Philippines, Singapore, Thailand, Vietnam)

2. ATIGA: ASEAN Trade In Goods Agreement3. CEPA: Comprehensive Economic Partnership Agreement 4. APTA: Asia Pacific Trade Agreement (incl. Bangladesh, China, India, Lao, S. Korea, Sri Lanka)5. ECFA: Economic Cooperation Framework Agreement6. EPA: Economic Partnership Agreement7. RCEP: Regional Comprehensive Economic Partnership

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Practical challenges of using FTAs

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3rd Party Vendors Distribution HubImporters in Asia

Countries

Goods flowInvoice flow

Supplier level

• How to verify origin?

• Can supplier obtain Certificate of Origin?

• Apply consistent HS code?

• How to manage 3rd

parties?

What if there is third party invoicing?

Hub level

• What activities are conducted?

• Bulk breaking activities?

• How to obtain “Back-to-Back” CoO?

Importing country

• IOR responsibilities?

• Documentation requirements?

• Post import audit challenges?

PwC

Frequently Asked QuestionsWhat can be done to manage FTA claims?

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Q&A 1. What are the general areas of scrutiny by Customs regarding

FTA claims?

2. Does trans-loading violate the “direct-shipment” rule? What are the practical challenges of obtaining a Certificate of Non-Manipulation?

3. Will “pick and pack” activities in a third country jeopardize my FTA claim?

4. Is there any “return goods relief” provision in Asia for products that are manufactured but temporarily exported (e.g. round tripped to the regional DC)?

PwC

Part 4

Non-tariff Measures: Labelling (permanent inside label, wash and care standards, and hangtags) and Inspection

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PwC

OverviewSeverity of non-tariff measures in Asia…

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Inspection & Testing

Product Labelling Licensing

Japan

S. Korea

China

Hong Kong

Taiwan

Malaysia

Thailand

Vietnam

PwC

Case Study - Product Labelling in China

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Labelling Key Information

• Each individual product corresponds to a specific Product Standard

• Product Standards are based on product categories (e.g. shirts, dresses, jeans, etc. ); but CIQ inspection is based on HS code

• Most textile Product Standards refer to a more general National Standard for safety/testing and labelling requirements

• Product labelling can be challenging due to lack of transparency

PwC

Frequently Asked QuestionsWhat can be done to manage NTM?

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Q&A 1. What is the typical CIQ clearance lead time in China?

2. If there is a dispute with Customs or the inspection authority (e.g. CIQ in China) at the border, what can be done to release the goods to minimize supply chain disruptions?

3. Is there any pilot program available? How does it help speed up clearance lead time?

4. Does it help if my products are tested in a foreign lab?

PwC

Part 5

Trade Facilitation

Overview

Trade Facilitation Programs in Asia

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PwC

Overview: Trends in international trade controls

Current trade restrictive measures imposed in Asia

Source: WTO Integrated Trade Intelligence Portal (I-TIP), updated Mar 2015

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0

50

100

150

200

250

Sanitary and Phytosanitary Technical Barriers to Trade

Anti Dumping Safeguards

WTO report on trade restrictions:

• 1124 trade restrictive measures are currently in force within the Asia Pacific region (including China, India, Indonesia, Japan, S. Korea, Malaysia, Singapore, Taiwan, Thailand and Vietnam)

• These trade restrictive measures include trade remedy actions (e.g. anti-dumping), tariff increases and more stringent customs procedures

PwC

What do Asian trade facilitation programs typically offer?

Potential Tangible Benefits Lower risk profile

� Less inspection� Fewer red flags� Reduced audits

Simplified documentation

Waiver of guarantee requirements

Periodical or deferred declaration or duty payment

Faster clearance

Designated Customs coordinator

Extension of operational hours

Training/updates by Customs

Mutual recognition

Potential Intangible Benefits

Collaboration with Customs

Supply chain improvements

Improve staff’s customs knowledge and awareness

Intellectual property protection

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What is my ideal program?

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Market Target Program

Japan AEO Program

S. Korea Generally cannot benefit from AEO Program

China Advanced Certified Enterprise or Certified Enterprise

Hong Kong Not applicable (AEO benefits are limited)

Taiwan Not applicable

MalaysiaGenerally cannot benefit from AEO Program (e.g. textile companies are not eligible for AEO application)

Thailand AEO Program

Vietnam Priority Enterprise

PwC

Part 6

Case Study:

#1 Asia Distribution Centre located in the China (Shanghai) Pilot Free Trade Zone (“SPFTZ”)

#2 China Cross-border e-Commerce

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PwC

#1 – Asia DC in SPFTZ: Customs and CIQ Solutions

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Separate

declarations

Consolidated

declaration

China Domestic Market SPFTZ Overseas

Tier 2 Tier 1

Register-first enter later

OR

Separate

declarations

Consolidated

declaration

Export

OR

OR

Distribution Center

Inward

Outward

Enter-firstregister later

Import

Customs Registration/Declaration

PwC

What about an Asia DC elsewhere in China?

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• New PFTZs are expected to be established in Guangdong, Tianjin and Fujian.

• The overall polices were passed during the meeting of CPC Central Committee Political Bureau dated 24 Mar 2015.

• Date of establishment is not published but expected to be soon.

New Pilot Free Trade Zones (PFTZ) outside Shanghai

• Shanghai SPFTZ is expected to be expanded to Lujiazui, Shibo, Jingqiao and Zhangjiang area.

Expansion of Shanghai PFTZ

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Implementation ActionsWhat are enterprises doing?

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Identifying a “win-win” outcome for all parties including Customs/CIQ, 3PL, Customs Broker, etc.

1. Informally “test-with-water” with Customs and CIQ about the desired trade facilitation solutions.

3. Formally align with Customs & CIQ on the implementation (including possible pilot program)

2. Complete gap assessment, feasibility study, transition costs, and quantify the net benefits

4. Proceed with implementation including possible self-audit and validation review 12 months after implementation.

Managing stakeholders

Partnering with Customs and CIQ

Leveraging Technology

Integrate your new SPFTZ trade facilitation solutions into your Global Trade Management (GTM) program particularly in the areas of master data files, interface with external service provides, generating customs declaration sheets, and other deploying automated reporting requirements to Customs and CIQ.

PwC

#2 - China Cross-border E-commerce

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3rd party carrier

(Customs declaration)

B2C

Domestic Company(Customs

Declaration)

Overseas Company

B2B

B2C

Goods Flow

Payment Flow

Overseas

China

Considerations

General

• Personal parcel exemption (Customs duty ≤50, exempt; >50, subject to personal parcel tax rate)

• Limitation on annual purchase amount for individuals

• Logistics/warehousing cost

Customs

• Tariff classification and duty assessment method

• Determination of dutiable value• Customs clearance formalities (e.g.

Importer of Record, Trade Mode, etc.)• Customs clearance lead-time• Customs inspection• Handling of returned goods

CIQ

• CIQ inspection/testing (e.g. License A)

• CIQ clearance lead-time• Labelling requirement

B2C Model B2B2C Model

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#2 - China Cross-border E-commerce

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#2 - China Cross-border E-commerce (Cont’d)

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• Value threshold for personal parcel (RMB 1000/ RMB 800)• Product limitation • Enterprise/Brand/Commodity registration requirement• Limitation on annual purchase amount for individuals • Logistics/warehousing cost

General

• Tariff classification and duty assessment method • Determination of dutiable value• Customs clearance formalities (e.g. Importer of Record, Trade Mode, etc.)• Customs clearance lead-time• Customs inspection in “first tier” (inbound) and “second tier” (import)• Handling of returned goods and duty refund

Customs

• CIQ inspection in “first tier” (inbound) and “second tier” (import)• CIQ clearance lead-time• CIQ pre-inspection (e.g. importation of CCC products)• Labelling requirement

CIQ

PwC

3rd Party E-commerce PlatformsJust some examples…

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T-Mall International

http://www.tmall.hk/

• Only overseas incorporated enterprises could set up at T-Mall Int’l

• Products should be sold / shipped from overseas

• Trademark registration (inside or outside China)is required

T-Mall

http://www.tmall.com

• One of China’s largest and most popular existing online shopping platforms

• Only China incorporated enterprises could set up at T-Mall

• 3 types of stores: Flagship, Franchise and Specialty Store

• Trademark registration within Chinais required

• Innovative cross border B2C supply chain platform

• Aims at guaranteeing high quality and payment security

• Products supplied from brands from over 8 countries including the US

Customers

CCIG Mall

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Part 7

Summary & Q&A

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Summary of Key Messages

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Asia Pacific continues to be one of, if not the most, important and prospective markets for the fashion and retail sector.

Managing trade compliance in Asia could be more challenging due to less transparent rules and revenue driven practices. However, understanding and proactively managing the issues could help to mitigate compliance risks.

Tariff (e.g. customs valuation, especially related party transaction and royalty payments) and non-tariff measures (e.g. licensing and labelling requirement) are the key areas of scrutiny.

FTAs should be utilized to create duty saving opportunities. Bonded Asia distribution centers are feasible. Improving documentation and joining country-specific trade facilitation programs could greatly enhance supply chain efficiency.

Staying up-to-date with government policies and initiatives is essential for companies looking at developing multi channel distribution such as e-commerce and omni-channel retailing.

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Q&A

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PwC

Thank You!

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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