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Transfer Pricing – New Risks in Declaring Price Impact of Special Relationship to China Customs
China Customs recently requires that the importer or exporter of record declare the impact on the import or export price of its special relationship with the counterpart (“Price Impact”). Specifically the declaring party must state whether its special relationship, if any, would affect the transaction value or price as declared to the China Customs. Previously the special relationship was an item of declaration subsequent to a specific request from the Customs. However, the impact of the special relationship was not an item of declaration, and the declaration party even had a general defense right to disprove such Price Impact. The Price Impact, if any, has been a pre-condition for the Customs not to accept the declared transfer price for the purpose of ascertaining dutiable price of a given import or export shipment, in which case, China Customs shall re-value the given shipment according to China customs valuation rules.
The request for declaring Price Impact originates from a recent Circular 20 (2016), proclaimed on March 24, 2016 by Administration of General Customs of PRC (“GAC”). Under Circular 20, the declaring party has to declare and affirm Item 44 – Affirmation of Price Impact. If the declaring party cannot show that the import or export price or value is approximate to the value of identical or similar goods, or to the value out of deduction method or computing method under Circular 213 (which is a customs valuation regulation), the declaring party must declare existence of such impact by confirming “Yes” on the declaration document; otherwise, declare non-existence of such impact by stating “No”.
We believe such price impact declaration requirement embodies serious legal problems as follows:
In the first place, pursuant to the official commentary on Article 1 of WTO Agreement on Customs Valuation (“WTO Agreement”) and Article 44 of Circular 213, China Customs shall have reasonable grounds to pose written query against the transfer price. Only under such circumstances shall the declaring party confirm whether such special relationship has an impact on the import or export price. The declaring party also has the option not to so confirm, with the possible consequence of customs’ rejection of transfer price as the basis of dutiable price and valuation of the import or export transfer price for the given shipment. The mere special relationship shall not be a reason of the customs query against import or export transfer price.
However, according to Circular 20, each import or export shipment between related parties will be subject to declaration of Price Impact even when the Customs have no grounds for a price query or even the Customs poses no query at all. This requirement is repugnant to WTO Agreement and Article 44 of Circular 213.
Secondly, under Circular 213, the declaring party will have the RIGHT to disprove Price Impact of the special relationship within the maximum 15 days when China Customs issues a written price query. Prior to a written price query, the declaring party does not have an obligation to affirm or disprove the Price Impact of the special relationship. Pursuant to Circular 20, however, the declaring party shall state whether the special relationship has affected the declared price at the instant time of import or export. This also deviates from the mandatory procedure of written price query which shall have been in place under Circular 213 before the declaring party is requested to explain (rather than declare) whether the Price Impact exists. As a legislative matter, Circular 20 as operating rules is not in a position to alter Circular 213, a customs regulation in nature. Such repugnancy would inevitably trigger chaos in customs revaluation practice concerning cross-border transfer pricing transactions. Furthermore, in case the declaring party declares and confirms such Price Impact, China Customs will have the legal obligation (of course the power as well) to advance written price query and value each shipment as far as possible, so as to avoid its risk of liabilities for omission. In such a case, the declaring party will possibly lose its right of rebuttal under Circular 213 as it has already affirmed Price Impact at the time of declaring the import or export shipments.
Thirdly, on the basis of Article 8 of Circular 213, the circumstances of sales can be considered in determining whether such Price Impact exists. However, Circular 20 does not permit consideration of such defense on the part of the declaring party.
Fourthly, the essence of requiring declaration of Price Impact is to turn the defense right to disprove Price Impact under Circular 213 into an absolute declaring obligation. It is irrational for Circular 20 to require the declaring party declare such a defense right under Circular 213.
Lastly, it is generally very difficult for multinational companies to determine if a special relationship has affected the declared price, as it provokes the tension between the WTO Agreement and customs valuation on the one hand, and the OECD Transfer Pricing Guidelines on the other, which are totally two different creatures in practice. Hence such a declaring requirement is unreasonable in practice.
The declaring company shall also note that imprudent declaration of “No Price Impact” may trap the declaring party into false declaration and accumulative non-compliance liabilities. It is easy for China Customs to conclude “constructive existence” of Price Impact under Circular 213 when the declaring party cannot show a declared price is proximate to the price of identical or similar goods or the price out of the deduction or computing method prescribed under Circular 213 itself. If such constructive existence occurs, the scope and consequence of the declaring party’s liabilities would depend on China Customs’ ability to find “objective and quantified” data to reach a valuation price or evidence of intentional incorrect declaration of “No Price Impact”. In the latter case, the risk of smuggling may ensue from intentional improper declaration of the Price Impact.
Given the declaring requirement under Circular 20, the declaring party will bear the consequence of customs valuation of each import and export shipment if it declares “No Price Impact”, or alternatively declare “No Price Impact” at the risk of accumulative liabilities.
From the legal perspective, we believe the requirement of declaring Price Impact under Circular 20 violates the gist of both WTO Agreement and Circular 213. It also lacks reasonability and impedes simplified customs supervision objectives on the other. Such a requirement shall be revoked or alternatively accommodate such declaration as “unable to determine” with respect to the Price Impact.
HaoLiWen Client Alert is published solely for the interest of friends and clients and should not be relied upon as the legal advice of any kind from us. Should you have any questions about this Client Alert, please contact the partner of HaoLiWen Customs & Trade Practice Group.
赵德铭 Deming Zhao, Partner
周和敏Parry Zhou ,Partner
韩抒 Shu Han, Partner
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