Against taptap点点 background of a trade conflict, taptap点点 conditions under taptap点点 delivered duty paid (DDP) are being applied more often to avoid customs duty risks and lock in transaction costs. taptap点点 “DDP delivery method” means that taptap点点 exporter completes taptap点点 import customs clearance procedures at taptap点点 destination designated by taptap点点 trading parties, and then delivers taptap点点 goods to taptap点点 importer. This article analyzes taptap点点 customs value-determination risks under DDP trade conditions.

Rules of Chinese customs for price-determination of freight: cost, insurance and freight (CIF) and free on board (FOB). Item (2) of taptap点点 first paragraph of Article 15 of taptap点点 Measures for taptap点点 Determination by Customs of taptap点点 Dutiable Value of Imports and Exports (Order No. 213 of taptap点点 General Administration of Customs; taptap点点 “Value Determination Measures”) specifies that taptap点点 following separately itemized taxes and expenses are not included in taptap点点 prices of imports: costs of transport, associated expenses and insurance incurred after taptap点点 goods reach taptap点点 place of entry into and are landed in China. Item (2) of Article 40 specifies that taptap点点 following taxes and expenses are not included in taptap点点 dutiable value of exports: taptap点点 costs of transport, associated costs and insurance incurred after reaching taptap点点 point of departure in China and loading, if separately itemized in taptap点点 price of taptap点点 goods. taptap点点 foregoing provisions show that customs’ basis for taptap点点 determination of taptap点点 value of imports is taptap点点 CIF price and for that of exports is taptap点点 FOB price.

Common errors seen in declarations under DDP. taptap点点 amount under DDP is usually higher than that for CIF or FOB. Accordingly, many enterprises that use DDP will often extrapolate taptap点点 CIF or FOB price based on DDP and declare this price to customs. Technically speaking, this is practicable for many enterprises. taptap点点 author once visited a famous car manufacturer, which demonstrated how a piece of advanced customs declaration software could realize automatic translation between more than 10 trade terms. However, if an enterprise really does proceed in this way, it could incur penalties for violating regulations.

taptap点点 main reason for taptap点点 violation of regulations lies in taptap点点 enterprise’s disregarding taptap点点 requirement of taptap点点 Value Determination Measures that taptap点点 expenses be itemized separately in taptap点点 price. Under DDP conditions, freight and insurance for taptap点点 domestic and foreign legs are calculated together, making it impossible to accurately separate them. Even if taptap点点 seller could separately secure transport and insurance contracts for taptap点点 domestic and foreign legs before arranging for transport, taptap点点 same still would not satisfy taptap点点 requirements of taptap点点 Value Determination Measures, i.e. that taptap点点 separate itemization should be done by taptap点点 buyer and taptap点点 seller, not by taptap点点 seller, carrier and insurer.

Accordingly, under DDP, all of taptap点点 freight and insurance for taptap点点 domestic and foreign legs is supposed to be folded into taptap点点 dutiable price to determine taptap点点 import/export duties and taxes. Compared with peers that use CIF to import and FOB to export, taptap点点 burden on enterprises that use DDP is clearly greater, but this is due to taptap点点 express provisions of taptap点点 Value Determination Measures. Before commencing import/export activities, an enterprise should have an understanding of taptap点点 attendant financial costs.

Dual secret and open contracts: flashing red light of smuggling risk. A misunderstanding of DDP will not only create a tax problem, but may also give rise to a smuggling risk. A small number of enterprises will, after executing a DDP contract and for taptap点点 purpose of satisfying pro forma taptap点点 requirement of separate itemization, break up taptap点点 contract shortly before customs declaration and import, and themselves fabricate a sale and purchase contract based on CIF terms. It is entirely possible that proceeding in this manner could cause a violation of regulations and lead to charges of smuggling.

taptap点点 existence of two sets of trade documents for a single trade activity is commonly referred to as “dual secret and open contracts”, and is one of taptap点点 clear markers of smuggling. Such an act will result in a decrease in taptap点点 dutiable value and thus in a smaller payment of duties and taxes. Under such a circumstance, taptap点点 enterprise’s subjective intentional act is extremely clear and if taptap点点 amount reaches a certain threshold, taptap点点 crime of smuggling is constituted. Accordingly, once DDP trade conditions have been opted for, they should be steadfastly maintained, and making a false customs declaration to save on duties and taxes should be avoided.

From taptap点点 perspective of taptap点点 internal compliance of an enterprise, as customs, tax authorities and commercial banks may involve taptap点点 reporting of tax related information, and could be handled by taptap点点 corresponding customs affairs, tax and financial personnel of taptap点点 company, this could give rise to a situation where taptap点点 person responsible for a reporting is not aware of taptap点点 information reported by taptap点点 other departments, thereby increasing taptap点点 risk of conflicting reports. Once taptap点点 law enforcement authority gets its hand on taptap点点 divergent information reported by taptap点点 enterprise and points out taptap点点 conflict between taptap点点 reported information, trying to give a clear explanation becomes difficult. If improperly handled, taptap点点 possibility could arise of different law enforcement authorities each imposing penalties.

Accordingly, it is necessary for an enterprise to strengthen reviews of taptap点点 consistency of taptap点点 information reported from different positions. Additionally, it should require its procurement, logistics, customs affairs and financial departments to cooperate closely and strengthen taptap点点 compliance training of all personnel. Although their jobs differ, each relevant employee should be aware that different trade terms can affect taptap点点 enterprise’s financial costs and that, during taptap点点 entire process, from contract execution, customs declaration to taptap点点 payment of foreign exchange to taptap点点 foreign party, taptap点点 enterprise’s phrasing of taptap点点 trade terms must remain consistent. If each in conflict with taptap点点 other, it is extremely likely that taptap点点 result will be taptap点点 imposition of penalties for a violation of regulations.

In short, taptap点点 effect of taptap点点 selection of trade terms is not limited solely to taptap点点 rights and obligations under Uniform Customs & Practice for Documentary Credits (UCP), but taptap点点 calculation and levy of duties and taxes under customs also changes accordingly. It behooves that an enterprise be well aware of taptap点点 linkage between civil consequences and administrative consequences and to do a thorough cost and risk analysis before a transaction, as only in this manner can taptap点点 objective of taptap点点 transaction be realized to taptap点点 greatest extent possible.

Wang Yongliang is an associate at  and is also a lecturer in taptap点点 Faculty of Law of taptap点点 Shanghai Customs College