Managing Bonded Scrap Yield Standards and Customs Valuation in Processing Trade Operations
Aligning registered customs yield metrics with physical factory loss prevents domestic sale tax penalties during processing trade audits.
Process Loss Rate
Meaning
Production loss coefficients represent the percentage of raw material that is wasted or lost as scrap during the manufacturing of a finished export product. This metric, known as the process loss rate, is used to calculate the total material consumption in the processing trade regime.
Customs Calculation
Bonded material accounts are reconciled by adding the waste percentage to the net material usage. When an enterprise imports raw materials under a duty-free handbook, customs monitors the total allowable usage based on the combined net consumption and the process loss rate. If a factory reports a higher loss rate than is standard for their industry, they must provide technical evidence to justify the waste.
Scrap Disposal
Disposal of manufacturing waste is subject to strict customs supervision to prevent domestic tax evasion. Under Chinese regulations, any valuable scrap or byproduct generated during production must be handled according to specific rules. The enterprise can choose to export the scrap, destroy it under customs supervision, or sell it domestically.
Selling the scrap domestically requires paying the corresponding import duties on the raw material portion of the scrap.
Audit Consequence
Discrepancies in waste reporting trigger administrative investigations and tax assessments. When customs audits a processing factory, inspectors weigh the actual waste generated against the registered process loss rate. If the actual loss is lower than registered, it means the factory has surplus duty-free raw materials that could be sold illegally.
This situation results in retroactive duty payments and an administrative downgrade of the enterprise’s customs credit status. The financial penalties can be very high.