The situation
The Guangzhou subsidiary of a Japanese auto-parts group engaged us for an unrelated contract review. While examining its intercompany agreements, we noticed trademark royalties of 3% of net sales flowing to the parent — royalties related to the imported components and a condition of their sale, which under China's customs valuation rules should have been added to the dutiable value of imports. They never had been. Three years of entries were affected; we quantified the underpaid duties and import VAT at approximately RMB 3.1 million. Undetected, this profile — visible royalty remittances in foreign-exchange records against import declarations with no royalty element — is precisely what triggers a GACC audit, with penalties of 30% to 2x the duty shortfall and a customs credit downgrade.
What we did
- Quantified before approaching anyone. We rebuilt the dutiable-value calculation entry by entry with the client's finance team, separating royalties genuinely attributable to imported goods from those tied to locally sourced production, which lawfully reduced the disclosed amount.
- Structured the disclosure. We prepared a voluntary disclosure to Guangzhou Customs under the proactive disclosure regime: a complete factual statement, the corrected calculations, supporting transfer-pricing documentation and a proposed payment plan — framed precisely, because an incomplete disclosure can widen into a general audit.
- Managed the process. We attended all meetings with Customs, responded to two rounds of supplementary questions, and negotiated the treatment of late-payment surcharges.
- Fixed the system. We drafted a royalty-declaration procedure and annual review so future entries declare the royalty element correctly.
The result
Customs accepted the disclosure. The client paid the back duties and VAT, administrative penalties were waived in full under the voluntary disclosure rules, and the company's AEO certification application — the original reason the issue mattered commercially — proceeded unaffected. Total exposure avoided in penalties alone exceeded RMB 900,000 at the low end. The disclosure closed within four months of filing.
Results depend on the specific facts of each matter; past outcomes do not guarantee similar results.