Bonded Processing: A 12-Tonne Hole, an Unfiled Subcontract and Scrap Sold Locally
A processing-trade enterprise holds a bonded electronic account book for steel coil (HS 7209, MFN duty 5%, VAT 13%) imported duty-free for stamping automotive brackets. In the verification cycle just closed it imported 520 tonnes at USD 700 per tonne and had declared a single-consumption factor of 1.25 kg of coil per finished bracket. Records show 380,000 brackets produced: 350,000 exported and 30,000 sold to a domestic customer with no customs declaration of any kind. Fifteen tonnes of trim scrap were sold to a local recycler, also without customs formalities. The physical stock count at verification was 18 tonnes against a book balance of 30 tonnes. The enterprise says the 12-tonne gap is 'normal process loss'. Separately, 40,000 brackets were stamped by an outside factory that does not appear in the account book; the enterprise calls this 'temporary cooperation'. The verification report is being drafted and the enterprise wants to regularise everything before it is signed.
1. Reconstruct the material balance from the declared consumption factor and quantify the duty and VAT due on the undeclared domestic sale and on the 12-tonne shortfall.
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Material balance (tonnes of coil):
| Item | Tonnes |
|---|---|
| Imported | 520.0 |
| Consumed in 380,000 brackets (380,000 × 1.25 kg) | 475.0 |
| Trim scrap generated | 15.0 |
| Theoretical book balance | 30.0 |
| Physical count | 18.0 |
| Unexplained shortfall | 12.0 |
The books balance arithmetically. The problem is that 30 tonnes should be on the floor and only 18 are.
1. Undeclared domestic sale of 30,000 brackets. Convert product back to imported material using the declared factor: 30,000 × 1.25 kg = 37.5 tonnes. Value at the import price: 37.5 × USD 700 = USD 26,250 × 7.10 = CNY 186,375.
- Duty at the rate applicable to the coil on the date the domestic sale is declared, 5%: CNY 9,318.75
- VAT base 186,375 + 9,318.75 = 195,693.75; VAT at 13% = CNY 25,440.19
- Deferred-duty interest runs from the date of release of the coil to the date of payment.
2. The 12-tonne shortfall. Unless the enterprise can evidence it, treat it as a domestic disposal of material: 12 × USD 700 = USD 8,400 × 7.10 = CNY 59,640; duty 5% = CNY 2,982; VAT base 62,622 = CNY 8,140.86.
3. Totals. Duty CNY 12,300.75; VAT CNY 33,581.05, plus interest on both, plus the 15 tonnes of scrap which must be separately valued and regularised.
The conversion is the examinable step: the liability attaches to the bonded material, not to the domestic invoice for the finished brackets, so the sale price to the Chinese customer is irrelevant.
2. How should the process-loss claim, the unfiled subcontracting and the scrap sale be characterised, and what can the enterprise still do before the verification report is signed?
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Process loss. Only loss within the approved single-consumption factor is accepted without further evidence. Here the factor was declared as 1.25 kg per bracket and the books already reflect it; the 12-tonne gap sits outside that consumption, so calling it 'normal process loss' adds a label, not a fact. The burden is on the enterprise: weighing records, scrap-sale receipts, machine calibration logs, production yield reports. Absent that evidence, the shortfall is deemed a domestic disposal and taxed as above. If evidence exists, the enterprise should also consider whether the declared factor was wrong - in which case the factor itself must be corrected, with consequences for the whole cycle.
Unfiled subcontracting. Transferring bonded material to a factory not recorded in the account book, without prior filing or approval, is an unauthorised movement of bonded goods. It is not cured by calling it 'temporary cooperation'. Options before the report is signed: apply to supplement the filing if the rules permit it for the period, recall the parts and record them, or treat the 40,000 brackets as domestic sales and pay duty on the equivalent material. The outside factory's qualification to handle bonded goods must also be checked; an unqualified subcontractor cannot be regularised retrospectively.
Scrap. Trim scrap remains under bond. It must be reported and then exported, destroyed under customs supervision, or sold domestically with duty paid on the basis prescribed for residual material. Selling it to a recycler with no formalities is a disposal of bonded goods.
What regularisation buys. Early, complete, self-generated correction before the report is signed mitigates penalty. Concealment, or partial disclosure that customs later completes itself, does the opposite. The enterprise should present the full reconciliation - including the 12 tonnes it would rather explain away - as one package.
3. After the verification, how should the account book, the guarantee and the company's compliance standing be handled?
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Account book. The book must be brought back to a true position before it is closed for the cycle: record the domestic sales, discharge or pay on the scrap, record the shortfall as a disposal or substantiate it, and bring the subcontract into the book or discharge the material. A book closed with a known discrepancy simply defers the problem to the next verification and compounds it.
Guarantee and credit. Processing-trade enterprises typically operate against a guarantee or a credit facility tied to their compliance record. A discrepancy of this kind will normally cause the guarantee to be called or increased. The company should model the cash effect: duty and VAT on the domestic sale and shortfall, interest, any penalty, plus a possible increase in the guarantee amount for future cycles.
Compliance standing. Administrative penalties feed into the enterprise's credit classification, and a lower classification means more inspections, higher guarantee requirements and slower clearance - a cost far larger than the duty at stake. The enterprise should treat the classification consequence as part of the settlement strategy, not an afterthought.
Preventive controls to propose. Monthly material balance reconciliation against the consumption factor rather than annual verification; a change-control rule so that any subcontracting passes through the customs function before material moves; scrap sales routed through the customs function by default; and a documented review of why 30,000 brackets left the plant with no declaration at all. The last point matters most: the domestic sale is not an accounting slip, it is a control failure at the shipping gate.