www.pwccustoms.

com

Importing for retailing

in Japan
19 June 2014
Webinar for US Fashion Industry Association
 Your speakers today

Frank Debets +65 62367302

Managing Partner, PwC Singapore frank.debets@sg.pwc.com
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.

Howard Osawa +81 3 5251 6737

Managing Director, PwC Japan howard.h.osawa@jp.pwc.com
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 +81 3 5251 2839

Senior Manager, PwC Japan naoyuki.kano@jp.pwc.com
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

2,500
800,000 Other Other
2,000
USA USA
600,000 EU
EU
1,500
ASEAN ASEAN
400,000
China
1,000 China

200,000 500

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.

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 Market Access
Tariff Barriers
In Japan, customs duties on apparel
products are relatively high.
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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Non-tariff Barriers
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.
In addition, for domestic sales, various
quality & labelling standards for
apparel products must be fulfilled.
7
 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:
(i) transaction value of identical or similar goods,
(ii) deductive method
(iii) computed method or
(iv) fallback method. 9
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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 in-
market 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?
◦ 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.
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 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.
13
 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 Under Negotiation
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) GCC

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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 Component that does not Determine

Classification 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

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

Refund of import taxes where imported goods are re-exported in the state in which
Article 19-3
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 Description

Reduction of customs duty on products manufactured from goods exported for

Article 8
processing or assembling

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Labelling & standards in Japan
 Regulations for product labelling and safety

Act against
Unjustifiable Household Goods Act on Control of
Premiums and Quality Labelling Household Products
Misleading Act Containing Harmful
Representations Substances

Defines measures on Defines labelling Defines safety

labelling as well as standards for apparel measures for apparel
advertisement and textile products and textile products

Covers general Covers general Covers the general

restriction on information required on restriction on use of
misleading hangtags, sewn-in substances that may
labelling/display of labels, and packages be harmful
goods

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 Regulations for product labelling and safety

Act against Misleading Household Goods Quality

Representations Labeling
• Restrictions on misleading or Products must be labeled with
false labeling information specific information. The necessary
• The actual country of origin (“a information varies with the type of
country in which a treatment or product, but often includes:
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
name, national flag and heraldic labeler (importer, retailer, labeling
operator registered in Japan)
emblem other than of the country of
• Type of materials
origin may be deemed misleading
• Size
• Handling Precautions

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 Regulations for product labelling and safety

Act on Control of Household Pharmaceutical Affairs Act

Products Containing Harmful Any apparel deemed as a
Substances pharmaceutical or a quasi-
Certain 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.
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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.

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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 1. Equip yourself with regulatory
fairly constant in volumes. knowledge.
2. The ratio of E-Commerce to 2. Explore customs duty reduction
traditional market is estimated to opportunities.
grow. 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!

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