Tax and Customs Synergy: Shenzhen Leads New Mechanism to Benefit Enterprises

published on 25 May 2022 | reading time approx. 3 minutes

For a long time, import transactions between related parties have been the common focus of transfer pricing inspection by both Chinese Customs and tax authorities. However, as two independent systems with different emphases and positions, the Customs and tax authorities may have different judgments on the same business.

Generally, the Customs pays more attention to whether the price of imported goods is lower than the reasonable third-party transaction level, resulting in underpaid import duties and value added tax, while the tax authorities usually focus on whether the transaction price is higher than a reasonable third-party transaction level, thus eroding the income tax base of the domestic enterprise. The opposite concern makes it more difficult for the taxpayers to manage the transfer pricing risks, which is a long-standing difficulty in practice.

It is worth noting that on 18 May 2022, the Shenzhen Customs and Shenzhen Tax Authority jointly issued a circular (“Shenzhen Customs Tax [2022] No. 62”) to take the initiative in China in launching a pilot project on the collaborative transfer pricing administration of import transactions between related parties (“collaborative administration”), which takes into effect from the date of issuance. The main contents are as follows:

Applicable Scenarios of Collaborative Administration

The measure is aimed to enterprises in Shenzhen, who shall meet both of following two preconditions for application for collaborative administration:

Enterprise shall be engaged in actual import and export activities and the registered foreign trade operator at the Customs;
Enterprise has incurred related-party transactions of more than RMB 40 million in each of the three years preceding the tax year when the Notice was issued by the tax authority in charge.

Process of Collaborative Administration

1. Enterprise shall apply to the Customs and the Tax Authority at the same time and submit relevant documents;

2. After receiving the application, the Customs and the Tax Authority shall jointly determine whether the enterprise meets the conditions for acceptance within 10 days from the date of the application. After acceptance of the application, the joint assessment shall be initiated within 15 days from the date of acceptance to negotiate with the enterprise on imported good prices of related-party transactions, and the Customs and Tax Authority may conduct interviews or field verification independently or jointly with the enterprise if necessary;

3. The Customs and the Tax Authority reach an agreement and sign a tripartite Memorandum of Collaborative Administration (“Memorandum”) with the enterprise, in which the Customs makes a pre-determination on import price and the Tax Authority agrees an Advanced Pricing Arrangement (“APA”). The synergistic price of import goods referred to in the Memorandum is applicable for three calendar years. If the Customs and the Tax Authority cannot reach a consensus, the collaborative administration process shall be terminated and the enterprise shall be informed in writing.

Memorandum Execution

Price Adjustment: The synergistic price reached by the enterprise in accordance with the Memorandum shall be used as the final customs dutiable value of imported goods and the good cost in the annual corporate income tax declaration. During the applicable period of this Memorandum, the actual financial indicators of any year of the applicant shall be implemented in accordance with the median value of the fair trade range determined by consensus among the three parties. If the price is lower or higher than the median value, the applicant shall adjust the price according to the median value of financial indicators.
Annual Report: The enterprise shall submit the annual report on the implementation of collaborative transfer pricing administration in paper and electronic version to Shenzhen Customs and Shenzhen Tax Authority within 6 months after the end of each year during the applicable period of the Memorandum, explaining the enterprise's business operation and the implementation of the collaborative administration.
Amendment or Termination: In the event of the following circumstances, Shenzhen Customs and Shenzhen Tax Authority will revise or terminate the Memorandum in accordance with relevant provisions:
1. Failure of the taxpayer to comply with the agreed synergistic price to implement price adjustment;
2. Substantial changes in the taxpayer's relevant assumptions resulting that the Memorandum is no longer applicable;
3. The taxpayer proposes to amend or terminate the Memorandum.
Renewal: The enterprise may apply for renewal to Shenzhen Customs and Shenzhen Tax Bureau within 90 days prior to the expiration date of the memorandum. The memorandum under implementation shall not serve as the basis for renewal. The applicant should re-submit the application in accordance with relevant regulations, and the Customs and the Tax Authority will re-examine the enterprise according to the latest business model and economic conditions.

Our Observation

The collaborative administration of Customs and Tax Authority in Shenzhen is at the forefront of optimizing the business environment in China, providing new administrative ideas and methods to solve the difficulties of cross-border trade. After the implementation of this measure, enterprises can more effectively respond to the joint inspection and assessment from the Customs and Tax Authority, which will increase the taxation certainty. On the other hand, this measure can also help enterprises to eliminate the burden of repeatedly preparing materials to the Customs and Tax Authority, which can also reduce enterprises’ compliance costs. In addition, it is expected that the Circular issued by Shenzhen Customs and Tax Authority is only the beginning of the cooperation mechanism between customs and tax authorities in the field of transfer pricing in China and this measure will likely be further extended to other regions with mature conditions in the future.