"Artificially lowering the declared purchase price has been the means of survival for a considerable number of wine importers, but this approach to securing profits is under serious attack as the customs authorities step up surveillance," a seasoned campaigner in the wine business told China Business News.

Meanwhile, news emerges that the major wine importers have all found themselves under investigation by customs for duty evasion issues, and that a Shenzhen wine importer's cargo is being withheld by the authorities.

"In our special operation against wine piracy last year, six cases were cracked in a single week. The cargos were worth 26.5 million yuan (US$3.9 million), involving duty of 5.9 million yuan (US$863,000)," an official from the Information Office of Shanghai Customs District explained in a telephone interview.

An open secret

"Collection of duty on imported wines has been a long-standing problem for China's customs, largely because of widespread wine varieties, drastic daily fluctuations in prices, and the customs staff's lack of foreign language skills," Constellation Wines' Chinese GM Xia Zhongbang told the newspaper.

"Customs duties, consumption tax, and VAT together add up to 41 percent in taxes on imported wines, the major factor in these wines' struggle to compete against domestic produce," said a wine merchant in Guangzhou. Meanwhile, the duty-free policy enacted last year in Hong Kong has increased pressure on the domestic wine market.

"Most licensed wine merchants make their imports through government-regulated channels, but lowering the declared purchase price to evade customs duty is an open secret in the business..." A senior insider claims that the profits accruing to different agents in the supply chain come from the consequent saving in duties.

The Guangzhou merchant provided an example: Take a 2005 Lafite. Each bottle costs from 10,000 to 12,000 yuan (US$1,464 to US$1,755). By lowering the declared purchase price by 50 percent the dealer can evade 2000-3000 yuan in duty, which means a huge increase in return since the regular profit margin is less than 10 percent.

Customs storm

Figures released by Shanghai Customs show that wine imports have increased by a factor of 50 in the past eight years, with the average annual increase exceeding 80 percent. Artificially-lowered purchase prices result in a massive level of tax evasion.

An informed source says that Shanghai Customs investigated a well-known importer last year, and discovered "a huge gap amounting to US$250,000". The customs refrained from issuing proceedings against the company, but demanded payment of the tax evaded, plus a 100,000-yuan fine. Other major wine importers are also rumored to have been caught in the authorities' investigations, and forced to cough up the tax avoided plus a fine.

The customs official did not reveal the names of the companies involved, but indicated that prices in their duty declarations had been lowered by some 50 to 70 percent, and that a variety of methods had been used. Once the situation had been rectified, Shanghai Port saw a 20 percent increase in the average price of imported wines, while the monopoly in the imported wine market was also loosened.

ASC sellout speculation

"The duty storm is forcing many wine importers to revert to accurate business reporting, thereby posing a serious challenge to their viability," says an insider. He says that higher costs in the context of the global economic crisis are stripping the wine giants of their elite image.

"ASC Fine Wines (ASC), the country's biggest imported wine dealer, recently revealed through business insiders a plan for a company selloff," the insider asserts. "It's a sensible move for the company to divide its shares, because in the business downturn sales of high-class wines in the top hotels and stores have fallen sharply, which in turn has affected the ASC profit margin."

However, an ASC official denied the rumor to the journalist, saying that the company is not encountering serious capital pressure but will bring in strategic partners to weather the storm.

(China.org.cn by Maverick Chen January 16, 2009)