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The high price of evading import duty in China

The high price of evading import duty in China

Monday, 21 October 2019
By Shining Zhu
Shining Zhu

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4 min read

Three months ago, Patek Philippe and Vacheron Constantin were two of the hottest searches on Weibo: not for their watches, but because of customers’ attempts to avoid import duty.

Last July 2nd, Shenzhen customs stopped a passenger entering the country with a Patek Philippe watch on his wrist. The watch in question, Ref. 5178G, is a self-winding minute repeater from the brand’s Grand Complications collection. Given that the selling price in China is 2.75 million yuan (around $386,000), under Chinese import duty policy the passenger was liable for 1.37 million yuan (around $193,000) of tax.

Pictures of the Patek Philippe watch from China Customs
Pictures of the Patek Philippe watch from China Customs

Customs officials found the watch during a routine x-ray scan of the passenger’s luggage, which revealed an empty watch box. They were then able to make a link between the box, for a Patek Philippe watch, and the watch the man was wearing, also a Patek Philippe. When questioned, the passenger admitted he had carried the watch and the box separately in an attempt to evade customs inspection and import duty. The case has since been handed over to the Customs Anti-Smuggling Department. In addition to import duty, the man could also face a fine and a possible custodial sentence.

A smart move?

According to the current “Table of Tax Rates on Personal Luggage of Passengers and Personal Postal Parcels Arriving in China”, the tax rate on high-end wristwatches, timepieces and their parts and accessories (with a price estimated by customs at more than 10,000 yuan or $1,400) is 50% (previously 60%). For wristwatches with a value under 10,000 yuan, the rate is 30% (previously 20%). This means that a person who buys a watch worth 100,000 yuan (around $14,000) overseas will have to pay import duty of 50,000 yuan (around $7,000) when returning to China.

Wise to the fact that customs officials inspect luggage by x-ray, many Chinese returning home with a watch throw away the box and wear the watch. Except the law stipulates that any watch without an indication of source of purchase may be subject to inspection, whether it’s in your suitcase or on your wrist. With or without the box.

On July 10th, Beijing Intermediate People’s Court tried a case of smuggling ordinary goods. A 37-year-old man was accused of wearing a Vacheron Constantin watch through customs for tax evasion purposes. The watch was a Grande Complication “Crocodile”, from the brand’s highly exclusive Les Cabinotiers collection; a unique piece equipped with 15 functions including three major complications of tourbillon, perpetual calendar and minute repeater. The defendant placed the order for the watch in January 2015, and had it delivered to Hong Kong in May 2017 with a price tag of €1.1 million.

Crocodile Engraving on caseband
Crocodile Engraving on caseband

In view of the value of the watch in China – 19.3 million yuan -, the defendant was suspected of attempting to evade more than 10.04 million yuan in tax. Customs officers also seized a Vacheron Constantin watch on his left wrist, an Ulysse Nardin watch in his trouser pocket, a Swatch watch in his backpack, a Hermès handbag in his suitcase, and four Hermès shirts. In total, the case involved a value of more than 10.72 million yuan.

Given the size of the amount, the prosecution argued that the defendant should be investigated for criminal responsibility. The defendant denied the accusation, saying he was an overseas resident (with a household registered in Liaoning, holding a US Green Card and a Hong Kong ID card), and that the watches were not intended to be sold or given in the country, hence he had no obligation to declare or pay tax. A verdict was not pronounced in court.

Better buy at home

As the number of Chinese travelling abroad has increased, so has the number of cases of attempted tax evasion on re-entering the country. According to Chinese law, ordinary inbound residents carrying personally-used inbound articles obtained overseas with a total value of more than 5,000 yuan (around $700), or ordinary non-resident passengers carrying personally-used inbound articles intended to remain in China with a total value of more than 2,000 yuan (around $280), should spontaneously declare them at customs and take responsibility for the relevant taxation.

Under Chinese criminal law, tax evasion in excess of 50,000 yuan (around $7,000) constitutes the crime of smuggling ordinary goods and is punishable by a prison sentence of up to three years for between 100,000 and 500,000 yuan; three to ten years for between 500,000 and 2.5 million yuan; and more than ten years for any figure above that.

With such strict laws and tougher controls, Chinese consumers need to re-evaluate the risk of buying watches abroad. This, combined with brands’ efforts to close price gaps, suggest that more and more Chinese will choose to buy their watches at home.

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