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What Category Should Export Goods Produced Under Entrusted Processing Mode Be Classified Into? What Are the Key Points of Customs Compliance?
or complex compliance issues.
clearance and fund security.
I am a manufacturer based in Shanghai, mainly engaged in small mechanical and electrical accessories. Last month, I finalized the arrangement of entrusting a foundry to process 1200 sets of custom-made precision accessories for overseas clients, and I will go through the export procedure via a foreign trade agency this week. But yesterday the corresponding customs declaration specialist suddenly asked me which export category this shipment belongs to, and I got flustered immediately.
I have never paid attention to such details before, and now I am very worried that wrong categorization will lead to port detention, customs holding, and affect export tax refund — the profit margin of this shipment is only 8% anyway, if any mistake occurs, I will not only make no profit, but also pay for port detention fees and breach of contract penalty to the client. Besides, I still cannot tell whether my mode is processing with customer's materials or processing with imported materials, I want to clarify which category it should belong to, and what key details I must focus on during customs declaration?
Lucas LiuYears of service：8Customer Rating：5.0
Senior Operations ConsultantStart a Chat
First of all，we need to point out a common industry misunderstanding: many processing trade enterprises confuse the export categorization of **Entrusted Processing with Customer's Materials** and **Entrusted Processing with Imported Materials**，and conduct arbitrary customs declaration and categorization only based on experience，which is the core root of subsequent risks.
If categorization is incorrect，it will first trigger customs price assessment and categorization review. In minor cases，the goods will be detained at the port for 3-7 days，generating thousands of RMB of daily port detention fee and container detention fee，in severe cases，it will be identified as inaccurate declaration，imposed a fine of 5%-30% of the goods value，and will also affect the enterprise's customs credit rating，leading to the subsequent customs inspection rate soaring to 100%. If it involves export tax refund，wrong categorization will directly lead to the rejection of tax refund application，extend the tax refund cycle to more than 3 months，and even make the enterprise unable to enjoy tax refund benefits.
Risk prevention method: Sort out core certificates of the processing mode in advance — if raw materials are provided by overseas clients and the enterprise only charges processing fees，it belongs to processing with customer's materials，and the corresponding export category is "re-export after processing with customer's materials"，if raw materials are purchased by the enterprise itself and all finished products are exported，it belongs to processing with imported materials，and the corresponding export category is "re-export after processing with imported materials".
Practical risk mitigation tip: Entrust an institution with pre-categorization qualification to issue a Pre-Categorization Opinion 3-5 days in advance，and submit it as an attachment to customs declaration，which can directly avoid categorization disputes，and you can provide evidence quickly for customs clearance even if a follow-up review is conducted.
Linda GaoYears of service：7Customer Rating：5.0
Documentation SupervisorStart a Chat
The core of categorization of entrusted processing export goods lies in distinguishing the attribute of the processing mode. Under the entrusted processing with customer's materials mode, raw materials are provided by the overseas entrusting party, the enterprise only charges processing fees, the export goods shall be classified into the category of "re-export after processing with customer's materials", and documents such as Processing with Customer's Materials Registration Manual and entrustment processing agreement shall be submitted during customs declaration; under the entrusted processing with imported materials mode, raw materials are purchased by the enterprise itself for processing into finished products for export, the goods shall be classified into the category of "re-export after processing with imported materials", and documents such as Processing with Imported Materials Registration Manual and purchase contract shall be submitted. If the categorization is not accurate, customs will initiate a categorization questioning procedure and require the enterprise to supplement evidence. During this period, the goods cannot be released and need to be temporarily stored in the port area, generating additional costs. In addition, wrong categorization will affect the enterprise's credit rating issued by customs. After the credit rating is lowered to Class C or Class D, 100% inspection will be implemented for subsequent customs clearance, which greatly extends the customs clearance time.
Kevin LinYears of service：4Customer Rating：5.0
Trade Solutions ManagerStart a Chat
The categorization of entrusted processing export goods directly affects tax costs and tax refund rights. Under the entrusted processing with customer's materials mode, the enterprise only pays value-added tax (VAT) on processing fees, and the processing fee part can apply for VAT exemption, but cannot enjoy export tax refund; under the entrusted processing with imported materials mode, the input VAT of raw materials purchased by the enterprise can be credited, and after finished products are exported, the enterprise can apply for export tax refund according to the corresponding tax refund rate of the product.
If processing with imported materials is incorrectly classified as processing with customer's materials, the enterprise will lose the export tax refund quota. Calculated based on the current average 13% tax refund rate for mechanical and electrical products, goods with a value of 1 million RMB will cause a tax refund loss of 130,000 RMB; on the contrary, if processing with customer's materials is incorrectly classified as processing with imported materials, abnormal tax declaration will occur due to no corresponding input VAT credit, which triggers a correspondence investigation by the tax authority. The enterprise needs to spend 1-2 months cooperating with the investigation, which affects capital turnover.
Cindy ChenYears of service：3Customer Rating：5.0
Key Account ManagerStart a Chat
The categorization of entrusted processing export goods will directly affect the compliance of cross-border foreign exchange receipt and payment. Under the entrusted processing with customer's materials mode, the enterprise can only receive foreign exchange corresponding to processing fees, which needs to be declared as "processing fee for processing with customer's materials" in the foreign exchange receipt and payment system. If full payment is received, it will be identified as abnormal foreign exchange receipt and payment, triggering an investigation by the State Administration of Foreign Exchange; under the entrusted processing with imported materials mode, the enterprise can receive full export payment, which is declared as "general trade payment".
If foreign exchange receipt and payment are not declared according to the corresponding category, the State Administration of Foreign Exchange will include the enterprise in the key monitoring list, restrict the enterprise's subsequent foreign exchange purchase and settlement quota, and even suspend the enterprise's cross-border foreign exchange receipt and payment permission. In addition, wrong declaration will also affect the enterprise's foreign exchange cancellation, leading to failure to complete export foreign exchange collection cancellation procedures, which in turn affects subsequent export tax refund declaration.
Eric ZhouYears of service：6Customer Rating：5.0
Senior Manager of Foreign Exchange & Tax RebatesStart a Chat
The categorization of entrusted processing export goods needs to be consistent with the terms of the entrustment processing agreement, otherwise it will trigger legal risks. If the agreement clearly stipulates that it is processing with customer's materials, that is, the overseas entrusting party provides raw materials and only pays processing fees, but it is classified as processing with imported materials during customs declaration, once a dispute occurs, the overseas client may refuse to pay processing fees on the grounds that the enterprise violates the agreement, or require the enterprise to bear compensation for raw material consumption; if the agreement stipulates that it is processing with imported materials, but it is classified as processing with customer's materials during customs declaration, the enterprise may not be able to collect full payment from the client, and also needs to bear losses caused by tax and foreign exchange compliance risks.
In addition, when goods are detained by customs due to wrong categorization, if the enterprise cannot provide agreement documents matching the category, it may not be able to pick up the goods quickly through legal channels, need to pay additional lawyer's letter fee and port detention fee, and even face the client's claim lawsuit.
Michael ZhangYears of service：6Customer Rating：5.0
Customs Declaration & Compliance ExpertStart a Chat
The categorization of entrusted processing export goods will affect the focus and process of on-site customs inspection. For goods re-exported after processing with customer's materials, the focus of customs inspection is the source identification of raw materials and accounting certificates of processing fees, and customs will verify whether the quantity and specification of raw materials on the customs declaration are consistent with those stated in the processing agreement; for goods re-exported after processing with imported materials, the focus of customs inspection is the purchase certificate of raw materials and the consistency between finished goods and declared information, and customs will check whether the quantity and model of finished goods on the purchase invoice and customs declaration match the actual goods.
If categorization is wrong, the on-site customs officer will immediately suspend the inspection process and require the enterprise to supplement documents corresponding to the category. During this period, the goods need to be moved to the supervision warehouse designated by customs for temporary storage, and the resulting transfer fee and storage fee shall be borne by the enterprise. In addition, if documents cannot be supplemented within the specified time, the goods may be transferred to the anti-smuggling department for investigation, which further extends the processing cycle.
Grace WangYears of service：10Customer Rating：5.0
Senior Foreign Trade ConsultantStart a Chat
The categorization of entrusted processing export goods is a core inspection point of export tax refund audit. For goods re-exported after processing with customer's materials, the audit focuses on checking the consistency of processing fee invoices, foreign exchange receipt and payment certificates and the processing agreement, and confirming that the enterprise has not credited the input VAT of raw materials; for goods re-exported after processing with imported materials, the audit focuses on checking the consistency of raw material input invoices, export customs declarations and tax refund application forms, and confirming the matching between input VAT credit and tax refund application.
If categorization is wrong, the tax refund audit will directly reject the application and require the enterprise to re-declare. During this period, the tax refund cannot arrive, which affects the enterprise's cash flow. If the enterprise intentionally misreports, it will also be identified as fraudulent export tax refund, imposed a fine of 1 to 5 times the tax refund amount, and even be disqualified from export tax refund.