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Importing for retailing in Japan 19 June 2014 Webinar for US Fashion Industry Association

Your speakers today Frank Debets Managing Partner, PwC Singapore

+65 62367302

Howard Osawa Managing Director, PwC Japan

+81 3 5251 6737

[email protected] Frank is the Managing Partner of PwC’s Asian Customs and Trade practice, based in Singapore. On top of his managing and coordinating role, Frank advises companies on all aspects of the cross border movement of products.

[email protected]

Over 15 years, Howard has worked both in PwC Japan and PwC US. Howard has experience in transfer pricing, as well as business restructurings, and global tax optimization covering a wide variety of industries and transaction types. Naoyuki Kano Senior Manager, PwC Japan

+81 3 5251 2839

[email protected]

Since joining PwC in 2007, Naoyuki has been providing technical support for multinational companies seeking solutions to Japan Customs issues and international trade matters.

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Agenda 1.

Overview of the Japan fashion retail industry

2. Customs compliance matters 3. How to save costs

4. Labelling & standards in the Japanese market 5. Trade facilitation options 6. Q&A

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Overview of the Japan fashion retail industry

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Apparel market in Japan Retail Market Size The Japan domestic apparel retail market size in 2012 was JPY 9,160 Billion (USD 90 Billion) in sales, a 1.3% growth from 2011.

2012

USD 90 Billion Although significant market growth may not be expected due to declining birth rates and an ageing population, the trends stated herein are likely to continue, and thus the market size is expected to remain fairly stable for the next couple of years.

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Apparel market in Japan E-Commerce The B-to-C E-commerce (“EC”) market in Japan has been continuously growing for the past several years, with the total market size of retail EC business reaching JPY 5,000 Billion in 2012, of which the EC market size for the apparel industry was JPY 175 Billion, a 21.5% growth from 2011.

21.5% annual growth in apparel EC market

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Volume and Value of apparel product imported into Japan by country/region Volume: tons

Value: Billion JPY

1,200,000

3,500

1,000,000

3,000

800,000

600,000 400,000

200,000

2,500 Other

Other

2,000 USA

USA

EU 1,500 ASEAN

EU

China 1,000

China

ASEAN

500

0

0 2009 2010 2011 2012 2013

2009

2010

2011

2012

2013

Source: Trade Statistics of Japan

Analysis The total import volume of apparel products did not see a significant change in 2013, with only a 3% increase. The total import value (in Japanese Yen terms) of apparel products in 2013 saw an increase by 21.3% compared to the year before. PwC

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Market Access Tariff Barriers

Non-tariff Barriers

In Japan, customs duties on apparel products are relatively high.

A tariff quota (TQ) system is applicable to leather and leather shoes. The TQ system charges a lower duty rate (primary duty rate) on the imported goods not exceeding a certain quantity, and a higher duty rate (secondary duty rate) on quantities exceeding that volume.

The general tariff rate for apparel and fashion accessories range from 0% to 16%, and may even reach up to 60% for certain product such as for leather footwear.

Tariff Rate 0 - 16% However, by benefiting from FTA/EPAs, most of the duties applied on clothing may be reduced to 0%.

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In addition, for domestic sales, various quality & labelling standards for apparel products must be fulfilled.

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Customs compliance matters

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The customs value (1/3) - the theory The Customs valuation system in Japan is based on the “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994”, more commonly referred to as the WTO Valuation Agreement. The customs value must therefore be calculated on the basis of the transaction value, with adjustments for any necessary dutiable additions / deductions.

If the customs value can not be determined by the transaction value method, an alternative valuation method must be considered in the following order:

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(i) transaction value of identical or similar goods, (ii) deductive method (iii) computed method or (iv) fallback method.

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The customs value (2/3) - the practice • In practice, the transaction value method is by far the most common methods to value imported goods in Japan: • Invoice price + additions – deductions • Other methods are very uncommonly applied or accepted by Customs • Customs like to rely on verifiable data, which are usually only available inmarket data, so do not like a computed (“cost plus”) approach • TP adjustments to COGS require cumbersome re-declarations • But TP studies usually accepted as support for “arm’s length pricing” • Royalties and other fees tend to be scrutinized in detail • Buying commissions are often challenged by Customs • Regular (3-5 years) audits are a given, and focus on customs valuation

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The customs value (3/3) - some FAQs 1. Can I obtain a written valuation ruling from Japan Customs? ◦

Yes. Japan Customs issues an Advance Ruling in a written form upon written request from importers.

2. Who in Customs is asking the questions? ◦

Although basic customs questions are usually raised by port Customs at the time of importation, more advanced customs valuation related questions tend only to be asked during a customs audit.

3. Are Japan Customs fair? ◦

Usually yes; but well informed, well-trained and demanding!

4. Under what circumstances can I obtain a duty refund in Japan? ◦

Virtually none. Specifically a refund cannot be obtained for obsolete stock that is destroyed, or stock that is re-directed to another market.

5. Can I use a “First Sale for Export” scheme in Japan? ◦ PwC

No. In April 2012 Japan’s equivalent system that allowed purchase prices of a non-resident party to be declared as import values was discontinued. 11

Tariff classification The Customs Tariff Schedule in Japan is based on the “International Convention on the Harmonized Commodity Description and Coding System”, more commonly referred to as the “HS”. •

Japan’s tariff schedule is based on HS2012, and provides for 9 digit level classification (3 digit statistical subdivision codes after 6 digit subheadings)

•

Typical classifications are in Chapter 61/62 for apparel products, Chapter 42 for bags, and Chapter 64 for footwear.

•

Small differences in product can mean a different tariff code applies with a different tariff rate and/or different applicable non-tariff barriers.

•

Frequent changes of material compositions for seasonal apparel can cause difficulty in managing the process of determining correct HS codes.

•

As Japan tariff rates for apparel products are relatively high, importers’ close management of the tariff classification declaration is recommended, whether done in-house or outsourced to brokers.

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Post clearance audits Audits Japan Customs conduct random post clearance audits on importers and exporters. Around 5,000 audits are conducted annually.

5,000 audits per year Prior to an audit, Japan Customs will inform a company when it will take place, the period subject to audit, etc. During the audit, an importer/exporter is expected to provide documents relevant to transactions in question.

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From our experience, apparel industries tend to be targeted for post clearance audits. For the financial year of 2012, apparel products in Chapter 62 were ranked as fifth for the total amount of incorrectly declared import values, resulting in additional duty and import consumption tax of JPY 764.81 million collected by auditors.

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How to save costs

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Customs value unbundling “Unbundle” non-dutiable costs from the current price of products through the use of existing custom rules to reduce customs value and pay less duty at the time of import. Current price (current customs value)

Royalty (marketing IP related)

Unbundle

Buying commission

Other fees

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Preferential origin (1/3) - agreements Duty-savings opportunities for apparel products may be significant if importers appropriately qualify for and utilize preferential duty treatments. • Generalized System of Preference (“GSP”) Scheme ◦

Lower GSP duty rates applicable to products originating in 97 developing countries and in 47 least developed countries

• Economic Partnership Agreements (“EPA”) / Free Trade Agreements (“FTA”) ◦ Lower EPA/FTA duty rates applicable to products originating in countries with which Japan enters into EPA/FTA Implemented Singapore (2002)

Philippine (2008)

Australia

Korea

Mexico (2005)

Switzerland (2009)

Mongolia

Turkey

Malaysia (2007)

Vietnam (2009)

Canada

China-Korea trilateral

Thailand (2007)

India (2011)

Columbia

TPP

Indonesia (2008)

Peru (2012)

EU

RCEP

Japan-ASEAN (2008) PwC

Under Negotiation

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Preferential origin (2/3) - qualifying rules •

Substantial transformation of a product in the country of origin ◦

Change in tariff classification rule

◦

Value-added rule

◦

Specific processing rule

(Apparel products are typically subject to specific processing rules.) •

“Certificate of origin” issued by the appropriate authority in the country of origin to prove the substantial transformation

•

Direct shipment to Japan from the country of origin (or trans shipment in particular circumstances)

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Preferential origin (3/3) - an example Some FTAs allow certain components of imported goods classified under Chapters 61-63 to be ignored when applying the “Change in Tariff Classification” rule. Examples of decisions by Japan Customs: Component that Determines Classification

Component that does not Determine Classification

Full lining

Sleek Buttons, Zippers Labels

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Tariff Quota (1/2) - the basics A Tariff Quota (“TQ”) system exists for leather and leather footwear, involving the application of a primary or secondary duty rate. To enjoy the (lower) primary duty rate, a TQ application has to be submitted to and approved by the Minister of Economy, Trade and Industry to obtain a TQ Certificate before importation Example: HS Code

Duty Rate

64.03.20

Footwear with outer soles of leather, and uppers which consist of leather straps across the instep and around the big toe

- House Footwear

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011

-- For the “pooled tariff quota”

24%

012

-- Other (Not within the quota)

30% or 4,300 yen/pair, whichever is greater

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Tariff Quota (2/2) - practical considerations Which quota to use • Self-obtained from METI

• Held by others (e.g. trading companies)

Managing quota and non-quota imports

• Impact on pricing and customs valuation • Loss of control of supply chain if using third party quotas • Contractual arrangements

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Duty exemption, deduction and refund programs Customs Tariff Act

Articles

Description

Article 10

Reduction, or refund, of customs duty in the case of deterioration, damage, etc.

Article 17

Exemption from customs duty subject to re-exportation

Article 19-3

Refund of import taxes where imported goods are re-exported in the state in which they were imported

Article 20

Refund of customs duty where claimed goods, etc. are re-exported or destroyed, etc.

Act on Temporary Measurements Concerning Customs Article

Article 8

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Description

Reduction of customs duty on products manufactured from goods exported for processing or assembling

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Labelling & standards in Japan

Regulations for product labelling and safety

Act against Unjustifiable Premiums and Misleading Representations

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Household Goods Quality Labelling Act

Act on Control of Household Products Containing Harmful Substances

Defines measures on labelling as well as advertisement

Defines labelling standards for apparel and textile products

Defines safety measures for apparel and textile products

Covers general restriction on misleading labelling/display of goods

Covers general information required on hangtags, sewn-in labels, and packages

Covers the general restriction on use of substances that may be harmful

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Regulations for product labelling and safety Act against Misleading Representations

Household Goods Quality Labeling

• Restrictions on misleading or false labeling information

Products must be labeled with specific information. The necessary • The actual country of origin (“a information varies with the type of product, but often includes: country in which a treatment or process effecting substantial change • Composition of Fibers to the substance of the goods”) of • Washing label the product must be labeled. • Water repellency • Representations such as country • Name and contact address of the labeler (importer, retailer, labeling name, national flag and heraldic operator registered in Japan) emblem other than of the country of • Type of materials origin may be deemed misleading • Size • Handling Precautions PwC

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Regulations for product labelling and safety Act on Control of Household Products Containing Harmful Substances

Pharmaceutical Affairs Act

Any apparel deemed as a pharmaceutical or a quasiCertain chemical substances may pharmaceutical product due to its not be used for apparel products sold functions (e.g. bactericidal effect on in Japan. The manufacturer and/or the human body), must follow certain importer is responsible for labeling criteria. maintaining such safety measures. Any other apparel may not label or Examples of restricted substances are: advertise a medical effect that may • Triphenyltin compounds mislead consumers. • Vinyl chloride Food Sanitation Act • Methanol If dismountable accessories of an • Tetrachloroethylene apparel product are deemed as toys • Hydrogen Chloride for infants, they must comply with the • Potassium Hydroxide measures of this act to ensure safety when put in an infant’s mouth. PwC

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Trade Facilitation

NACCS • NACCS is a system to facilitate administrative procedures for customs clearance and logistics, by connecting public authorities and private businesses online. • Administrative procedures, such as vessel and aircraft arrival/departure procedures, import/export declarations, and various quarantine procedures (e.g. Food and Animal Quarantine) are concluded through NACCS.

• 98% of customs declarations are processed through NACCS. Customs has a database of past import/export declarations, and by using statistical data, declarations are classified into three screening categories (i) automatic permission; (ii) documentary examination; or (iii) physical inspection. Q: Can I obtain a database of our past import declarations like a Freedom of Information Act (“FOIA”) request to CBP? A: No. Japan Customs does not release any import /export declaration data. PwC

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Advance ruling request • Importers or other interested persons may request for an Advance Ruling for customs valuation, classification and/or origin, prior to importation. • Japan Customs will respond to an Advance Ruling request through either an official document, verbal, email or NACCS. • However, Advance Rulings can be relied on for import declaration purposes only when in an official document format. • Each Advance Ruling is valid for no more than 3 years for identical products imported under the same conditions.

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“Season Ticket” • When a commercial invoice is not sufficient to show the basis for determining the customs value, a form of “general valuation declaration” which clarifies how to calculate the customs value must be submitted at the time of import declaration. • There are two kinds of valuation declarations: • Individual Valuation Declaration; and • Comprehensive Value Declaration called “Season Ticket”. • Season Tickets are commonly applied for and issued by Customs in cases where customs values are subject to adjustments (e.g. assists, royalties, deductions etc)

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Authorized Economic Operator (AEO) • Japan Customs has developed an Authorized Economic Operator (AEO) program for importers, exporters, warehouse operators, customs brokers, logistics operators and manufacturers, • The AEO program is consistent with the “SAFE Framework” developed by the World Customs Organization, and is focused on ensuring security in the international supply chain and a safe and secure society. • The program provides AEO importers with benefits such as • compliance-reflected reduced examination and inspection at the time of import declarations; • pre-arrival lodgment of import declaration and permission; • release of cargoes before duty/tax payment declaration; and

• periodical lodgment of duty/tax payment declaration.

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Customs Affairs Representative (“CAR”) • Non-resident companies can be importers in Japan by appointing a CAR to perform activities such as import procedures, attending inspections, payment of customs duties, etc. on their behalf. • The CAR must be a Japan registered organization. • For implementation of CAR, the importer must lodge an application to appoint a CAR to Japan Customs. • Based on our experience, completing the application process and to receive Japan Customs approval takes at least 1 to 2 months.

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Summary

Summary Commercial Trends

Key Import Strategies

1.

Market size estimated to remain fairly constant in volumes.

1.

Equip yourself with regulatory knowledge.

2.

The ratio of E-Commerce to traditional market is estimated to grow.

2.

Explore customs duty reduction opportunities.

3.

Select an appropriate business model.

4.

Engage with appropriate service providers.

5.

Retain relevant documents and be prepared for audits.

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Thank you!

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Worldtrade Management Services Pte. Ltd. its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2014 PricewaterhouseCoopers Worldtrade Management Services Pte. Ltd. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Worldtrade Management Services Pte. Ltd which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.