A Customs and Tax Collaboration Means Good News for Taxpayers in China24th May 2022
Pricing related-party imports is always tricky, but it’s especially dicey in China, where customs authorities and tax authorities often subject taxpayers to concurrent import price adjustments. The issue is further complicated as customs and tax authorities have opposing agendas. Customs authorities want higher prices on imported goods, so they can collect more import duties. Meanwhile, tax authorities want to ensure that import prices aren’t too high, so they don’t eat into profits—and diminish the amount of tax revenue they’re entitled to collect. For MNEs, this means that finding a single price to please both authorities is a delicate dance—one that can result in not only import price adjustments, but also, double taxation.
To help ease the process, customs and tax authorities in the city of Shenzhen have launched a customs and transfer pricing management system. Outlined in a May 18 report, the “Notice of Shenzhen Tax Bureau of the State Taxation Administration and Shenzhen Customs on matters regarding the collaborative management of transfer pricing of related-party imported goods,” the framework should help alleviate double taxation, increase transfer pricing certainty, and reduce tax compliance costs. How does it work? Taxpayers can file an application with customs and tax, and the authorities will determine if the company qualifies within 10 days. If they do, the two authorities will work with the taxpayer to negotiate an acceptable transfer price. To do this, the authorities can jointly (or separately) conduct site inspections or meetings with the taxpayer. Once the three parties agree on a price, they will sign the “memorandum of collaborative management.” The collaborative management memorandum takes into account the duration of the agreement, the transfer pricing method and customs valuation method, the adjustment of the import price, and key assumptions that helped determine the import price. Once that is signed, the tax authority will sign an APA with the taxpayer.
Reaching the agreed-to price is just part of the process. The taxpayer must submit an annual report to ensure that pricing is in line with the memorandum. If the pricing fails to comply with the terms of the agreement, authorities can revise it or terminate it, which would leave taxpayers back at square one.