Compliance challenges and dispute resolution behind the new pattern of cosmetics import

LABEL： Telecommunications, media, entertainmentand high technology , Consumer Goods and Retail , Compliance business ,

For many years, the Chinese economy has continued to develop rapidly, and consumer spending has been increasing. However, in the recent macroeconomic environment, consumers are relatively cautious about their own consumption growth expectations. Reflected in the import of cosmetics, the total import value of cosmetics continued to grow from 2014 to 2021, reaching a peak of 24.88 billion US dollars in 2021. Afterwards, the growth rate of imports began to slow down and entered a negative growth zone, with the import value of cosmetics falling back to 17.94 billion US dollars in 2023. [1]

In order to seek breakthroughs, the cosmetics market is constantly exploring high-end cosmetics, personal care and perfume products, and optimizing the supply chain arrangement. However, this new pattern not only brings market opportunities, but also triggers unprecedented compliance challenges and dispute resolution needs. Why does the consumption tax calculation of high-end cosmetics frequently cross the legal red line? Are there any special regulatory requirements for the import of rare ingredient cosmetics and products containing hazardous chemical ingredients? Why do price declarations under special circumstances often incur huge tax or criminal risks? These issues are becoming key challenges that cosmetic import companies urgently need to address.
1、 The compliance risk of consumption tax in the import process of high-end beauty and personal care "hidden"

One of the characteristics of the new pattern of cosmetics in the post pandemic era is the clear polarization of consumer spending power. In the overall market downturn, high spending groups continue to pursue high-end products, cautious consumers tend to downgrade their consumption, and market share in the middle price range is squeezed. Data shows that in 2023, the market share of economy brands (with an average price below 200 yuan) and ultra high end brands (with an average price above 700 yuan) will increase to 59.1% and 20.5% respectively, while the market share of the mass cosmetics group (with an average price between 200 yuan and 700 yuan) will decrease from 23.2% to 20.4%. Under this new pattern, many imported cosmetics companies are accelerating the market expansion of high-end products to meet the needs of high consumption groups. However, this expansion also brings new compliance challenges, as high-end skincare and cosmetics are the "hardest hit areas" for the legal risks of consumption tax calculation in the import process.

According to Announcement No. 51 of 2022 by the General Administration of Customs (Announcement on Adjusting the Declaration Requirements for Some Imported Cosmetics), when the consignee of imported goods and their agents declare cosmetics under the tariff items 3303 and 3304, cosmetics with packaging indicating content by weight, volume, "tablet" or "sheet" should be declared based on net content. Due to the "Notice of the Ministry of Finance and the State Administration of Taxation on Adjusting the Consumption Tax on Imported Cosmetics" (Cai Guan Shui (2016) No. 48), high-end beauty and skincare products that are subject to a 15% import consumption tax are defined as imported with a dutiable price of 10 yuan/milliliter (gram) or 15 yuan/tablet (sheet) or more. The net content declaration of cosmetics by enterprises at the time of import is closely related to whether they pay the import consumption tax. Many enterprises have failed to declare net weight content in accordance with regulations, resulting in incorrect price declarations and the omission of import consumption tax, which ultimately led to fines imposed by customs.

In an administrative penalty case in Ningbo, the party involved, as a domestic agent of cross-border e-commerce, declared the import of multiple high-end skincare products to customs through online shopping bonded import (1210), with declared dutiable prices all below 10 yuan/gram and zero consumption tax paid. The customs inspection found that the declared high-end beauty and personal care products involved tariff codes 33049900, 33030000, 33049100, 33042000, and 33041000, all of which belong to cosmetics, and the first legal quantity declared by the parties was incorrect. The actual dutiable value was greater than or equal to 10 yuan/gram, corresponding to a consumption tax rate of 15%. The party's false declaration resulted in a total of over 5 million yuan in tax evasion. Ultimately, the customs will impose a fine of no less than 30% and no more than twice the amount of tax owed.
2、 Risk management of import licenses for beauty and personal care products containing rare ingredients

In the era of consumer resilience, consumers' shopping needs have shifted from fun and high aesthetics to the effectiveness of brand ingredients. Consumers have a better understanding of the ingredients in beauty and skincare products, and are more concerned about the effectiveness and safety of cosmetics. Rare animal and plant extracts have become important marketing selling points. Rare ingredients such as sturgeon caviar extract, ginseng, and American ginseng are commonly added to high-end beauty and personal care products. If the ingredient is listed in the Appendix of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) or other relevant protection catalogs, when importing beauty and personal care products containing the rare ingredient, it should be reported to customs and undergo inspection and quarantine according to legal requirements with an import and export permit certificate.

According to the CITES Convention, the Wildlife Protection Law of the People's Republic of China, the Regulations on the Administration of Import and Export of Endangered Wild Animals and Plants of the People's Republic of China, and other regulations, those who import endangered wild animals and plants and their products shall report to the customs for inspection and quarantine with a permit for import and export, and undergo inspection and quarantine. Those who illegally import, export or otherwise smuggle endangered wild animals and plants and their products shall be punished by the customs in accordance with relevant provisions of the Customs Law; If the circumstances are serious enough to constitute a crime, criminal responsibility shall be pursued in accordance with the law.

In an administrative punishment case in Fuzhou, the party entrusted a freight forwarder to declare a batch of imported goods to the customs in the form of bonded e-commerce, including a brand of gold caviar face cream, with the declared commodity code of 3304990039 (commodity name: other beauty products or cosmetics and skin care products whose content is indicated in the package by volume). After customs inspection, it was found that the product contains extract of sturgeon caviar, which should actually be classified under the product code 3304990031 (packaging labeled as containing endangered species ingredients in beauty products or cosmetics and skincare products by volume). An endangered species import permit certificate is required. The customs determines that the declaration of the commodity code of the imported goods by the party concerned is false, which affects the management of national licenses, and imposes a fine of not less than 5% and not more than 30% of the value of the goods.
3、 Import inspection and quarantine risks of cosmetics belonging to hazardous chemicals

With the continuous evolution of the personal care product market, major brands are striving to attract consumers through innovation in ingredients and efficacy, thereby driving the industry's competition to shift from traditional functional needs to added value. Under this new trend, "olfactory economy" has become an important battlefield. perfume is no longer limited to the field of luxury brands, and major beauty brands have launched their own fragrance products to meet consumers' pursuit of personalized smell. At the same time, as the new favorite in "her economy", nail polish is becoming the favorite of a new generation of female consumers with its rich colors and personalized expression. Convenient and easy to use makeup spray and mousse spray are also increasingly favored by consumers in the fast-paced lifestyle, and become essential items in daily makeup bags.

Perfume, nail polish and spray, which are different from general cosmetics, contain special solvents or boosters and are often flammable. Enterprises importing such cosmetics should declare in accordance with the requirements of the Announcement of the General Administration of Customs on Relevant Issues Concerning the Inspection and Supervision of Import and Export of Dangerous Chemicals and Their Packages (Announcement No. 129 of the General Administration of Customs in 2020).

           
（1） Administrative penalty risk for failure to declare hazardous chemicals to customs

According to the Regulations on the Safety Management of Hazardous Chemicals (State Council Decree No. 591) and the Announcement of the General Administration of Customs on Relevant Issues Concerning the Inspection and Supervision of Import and Export Hazardous Chemicals and Their Packaging (General Administration of Customs Announcement No. 129 of 2020), when importing hazardous chemicals, enterprises should include the dangerous category, packaging category, United Nations dangerous goods number, United Nations dangerous goods packaging mark, etc. in the customs declaration. If the party concerned fails to declare to the customs for inspection and is suspected of violating the relevant provisions of the Import and Export Commodity Inspection Law, the entry-exit inspection and quarantine institution shall confiscate the illegal gains and impose a fine of not less than 5% but not more than 20% of the value of the goods.

In a case of administrative punishment in Nanjing, the party concerned failed to declare the import spray to the customs for inspection. According to the "Classification and Identification Report of Hazardous Characteristics" issued by the Nanjing Customs Dangerous Goods and Packaging Testing Center, the main component "ethanol" contained in some goods belongs to the chemicals listed in the "Catalogue of Hazardous Chemicals" (2015 edition). According to the "Regulations on the Safety Management of Hazardous Chemicals" (State Council Order No. 591) and the General Administration of Customs Announcement No. 129 of 2020, inspection should be declared to the customs. The behavior of the parties involved has constituted a violation of the import and export commodity inspection regulations, and the customs will ultimately impose a fine.
（2） Criminal legal risks suspected of constituting the crime of evading commercial inspection

According to the Import and Export Commodity Inspection Law, if imported goods that must be inspected by the commercial inspection authorities are sold or used without being inspected, the commercial inspection authorities shall confiscate the illegal gains and impose a fine of not less than 5% but not more than 20% of the value of the goods; Those who commit crimes shall be held criminally responsible in accordance with the law.

In a cross-border e-commerce criminal case in Shanghai, the defendant Chen, as the head of the defendant unit, entrusted a third-party cross-border e-commerce platform company to falsely declare Japanese cosmetics that must be inspected by the inspection agency for general trade imports as goods that do not require inspection for cross-border e-commerce trade, and smuggled them into the country at a low price. The defendant Chen handed over the relevant documents to a cross-border e-commerce platform company, which forged a low-priced invoice based on the above documents and information for export declaration and import.

The court finally ruled that the defendant unit and defendant violated customs regulations, evaded customs supervision, entrusted a cross-border e-commerce platform company to falsely declare goods that should have been imported under general trade as cross-border e-commerce trade goods, and smuggled them into the country at a low price. At the same time, they violated the provisions of the Import and Export Commodity Inspection Law, evaded commodity inspection, and repeatedly sold imported cosmetics and other goods that must be inspected by the inspection agency without inspection. The circumstances were serious, constituting the crimes of smuggling general goods and evading inspection, and were punished for multiple crimes.
4、 The risk of special relationship transactions within multinational corporations affecting import declaration prices

Under the new pattern of global economic integration and diversified market demand, multinational cosmetics groups are facing an increasingly complex environment of related party transactions. These transactions are not only more diverse in type and amount, but also reflect the constantly changing strategies of enterprises in supply chain management, cost control, and market competition. For these cross-border goods transactions, customs usually pay attention to whether the special relationship between the two parties will affect the transaction price of the goods.

According to the Measures for the Customs of the People's Republic of China to Approve the Taxable Value of Import and Export Goods (hereinafter referred to as the "Valuation Measures"), if there is a special relationship between the buyer and the seller, but the taxpayer can prove that the transaction price is similar to any of the following prices that occur simultaneously or approximately simultaneously, it shall be deemed that the special relationship has not affected the transaction price of the imported goods: (1) the transaction price of the same or similar imported goods sold to a buyer within the territory who does not have a special relationship; （2） The dutiable value of the same or similar imported goods determined by the reverse pricing method; （3） The dutiable value of the same or similar imported goods determined by the method of calculating price valuation.

If the customs authorities believe that the declared price of the enterprise does not match the transaction price, they may request an adjustment to the dutiable value and pursue or supplement the corresponding taxes. If the investigating authority determines that the affiliated enterprise has evaded taxes through special arrangements, the enterprise will be held criminally responsible.
（1） Price Doubts and Price Negotiations

In the top ten audit cases for 2023 announced by Huangpu Customs, Luogang Customs, a subsidiary of Huangpu Customs, found that the transaction price of imported skincare products of a certain brand, including formal wear and non sale goods, was affected by special relationships after reviewing a company's "distribution agreement". After joint price questioning and negotiation with the customs department, the relevant imported goods' dutiable value was re approved and a supplementary tax of 160 million yuan was imposed.

According to reports from enterprises, customs usually pay attention to the following issues:

How are the transaction prices reached between buyers and sellers, and is the pricing strategy in line with the pricing conventions of the industry?

Is the pricing principle consistent between related party transactions and sales to unrelated third parties?

Whether the transaction price between both parties fully includes the cost, expenses, profits, etc. of the goods.

In response to the concerns of the customs, enterprises need to supplement information and submit a situation explanation to the customs based on the special relationship that does not affect the transaction price.

Before the customs officially issues the "Price Doubt Notice", cosmetics companies should seize the time window, actively communicate with the customs, and fully explain the situation. However, it should be noted that if the company lowers the price again after negotiation, it may be deemed as subjective intent and face the risk of anti smuggling measures.
（2） Criminal risk of affiliated enterprises suspected of evading taxes through special arrangements

In an extremely large high-end perfume smuggling case in China, the defendant company A, as an agent, purchased brand perfume from well-known European perfume companies and shipped the goods to Hong Kong. Hong Kong Company P is responsible for unpacking and assembling goods, warehousing and transportation, and then uses the name of Hong Kong Company P as a supplier to deliver goods to the defendant unit B in China. They also produce false invoices, contracts, packing lists and other customs declaration materials, and declare the import to the customs at 55% to 60% of the true price of the goods purchased from foreign companies. The final defendant company A purchased products from defendant company B as a retailer. After calculation, it was found that the tax payable was evaded by 57 million yuan.

           

The court believes that the evidence in the case can prove that the defendant Zhang is the actual controller of Hong Kong P Company and the two defendant units, and has the right to control the import prices declared by Company B, the transaction prices and financial transactions between Company A and Company B, as well as the special relationship between the three companies. When all the defendants knew the transaction price between the defendant company A and the perfume brand dealer, the defendant Zhang still decided to falsely declare the import between company B and company P in Hong Kong at a price lower than the true transaction price. This behavior not only violated the general business practice, but also violated the legal responsibility to declare to the customs truthfully, with the intention of evading customs supervision, and constituted a smuggling crime. The so-called buying and selling transaction between defendant company B and Hong Kong company P is a specific division of labor and cooperation in joint crimes, not a related party transaction in the sense of customs law, and does not apply to the provisions of the tariff regulations on determining the transaction price of related party transactions.

The court finally ruled that the defendant unit and the defendant were guilty of smuggling ordinary goods. The defendant unit A was fined 200 million yuan, the defendant unit B was fined 60 million yuan, the directly responsible person in charge was sentenced to 13 years in prison, and the other two directly responsible persons were sentenced to 5 years in prison and 3 years in prison with a four-year probation.

In the above case, the court compared the actual transaction price benchmark with the declared price of the importer based on the overseas procurement cost of the goods, in order to determine whether the enterprise intentionally underreported the price. Although the domestic importer does not directly purchase perfume, and there is a link of transit in Hong Kong, the case handling authority and the court, because of the special relationship between the buyer and the seller, equate the overseas purchase price of the goods with the real transaction price of the domestic importer. Once there is an inversion between the purchase price and the declared price, it is considered as underreporting price smuggling. However, the author believes that if it can be proven that there are uncertain factors in the procurement cost of imported goods, such as large fluctuations in the market price of the goods involved, time differences between procurement and import, and the inability to determine the true transaction price, it is debatable for the investigating authorities to directly use the overseas procurement cost of the goods as the true transaction price.
5、 Compliance recommendations for multiple legal risks in the import process of cosmetics

In the current new landscape, facing rapid market changes and constantly adjusting regulatory environments, cosmetics import enterprises should adopt a multi-faceted compliance strategy to ensure stable development in high-end cosmetics import business and reduce legal and operational uncertainties. We propose the following compliance recommendations:

Firstly, comprehensively understand and follow up on the new regulatory requirements, optimize the process and standardized management of import business. With the continuous changes in the imported cosmetics market and regulatory policies, trade enterprises engaged in cosmetics imports need to timely grasp the latest regulatory dynamics and requirements, strictly fulfill corresponding import procedures in various business processes, and establish a dynamic adjustment and comprehensive process and standardization management system to adapt to the new market pattern.

Secondly, conduct regular customs self inspections to ensure that the enterprise continues to comply with the new regulations. Enterprises should regularly conduct customs self inspections in the new market and regulatory environment to promptly identify and correct compliance issues in their operations. For any possible violations, companies can mitigate compliance risks and avoid or reduce potential penalties through proactive disclosure systems with the assistance of professionals.

Thirdly, strengthen compliance training and internal control for all employees to adapt to the market requirements under the new pattern. In the increasingly competitive new market environment, companies need to strengthen internal employee compliance training, especially in areas where risks are prone to occur in specific operations, to enhance employees' awareness of compliance and prevent administrative or criminal risks caused by illegal operations.

The fourth is to flexibly respond to customs investigations. For various investigations that may be initiated by customs, including enterprise self inspection, price questioning, special inspections, case investigations, and even criminal case investigations, enterprises should adjust their response strategies according to different law enforcement procedures, and promptly invite professionals to intervene. With the assistance of professionals, relevant enterprise documents should be reviewed and integrated to efficiently communicate with customs and reduce potential legal risks and economic losses.
6、 Summary

The Chinese cosmetics market is undergoing profound changes. Although the macroeconomic environment has made consumers more cautious in the short term, in the long run, the resilience and diversified demand of the market are driving the transformation of cosmetics consumption towards high-end and segmented fields. In this process, the innovation and exploration of major brands in high-end cosmetics, personal care, perfume and other product fields have injected new vitality into the market, and transnational supply chain arrangements have also maximized resource efficiency advantages. However, the compliance challenges that come with these opportunities cannot be ignored.

In this new pattern, enterprises need to go beyond the traditional extensive business model, actively adjust and optimize compliance management strategies in the import process, in order to effectively reduce potential legal and operational risks. At the same time, by establishing a comprehensive compliance management system, regular internal reviews, and risk assessments, enterprises can more flexibly respond to the constantly changing regulatory environment and find new breakthroughs in complex market competition. Only in this way can enterprises not only gain market share growth in the short term, but also establish a long-term stable market position and achieve sustainable business development.