Tax and Finance Series: The Impact of Special Relationships on the Assessed Customs Value of Imported Goods (Part One)
I. Background
On July 12, 2024, the General Administration of Customs released foreign trade data for the first half of 2024. The relevant data indicates a continuous positive trend in the scale of China's import and export trade. In terms of imports, the first half of 2024 saw imports of 9.04 trillion yuan, an increase of 5.2%.
With the advancement of economic globalization and the potential for a vast market demand in China, multinational corporations often consider establishing a subsidiary in China to quickly penetrate the Chinese market and maintain market share. Additionally, based on localized compliance considerations in industry, customs, and taxation, these corporations often use this subsidiary as a vehicle for importing products into the Chinese market.
In this context, for cross-border related-party trade within multinational corporate groups, in addition to transfer pricing tax risks, it is also necessary to pay attention to the impact of customs price reviews on imported goods. Among these, the confirmation of special relationships and the confirmation of price impact are of utmost importance.
From a legal perspective, special relationships have become one of the key factors in the customs valuation process, which not only increases the technical difficulty of customs declaration for import operations but also increases the compliance risks for companies. In response, we have collated relevant policies on customs valuation, hoping to provide a reference for multinational groups to anticipate and prevent customs legal risks.
II. Regulatory Legislation
To adapt to actual trade and customs business reforms, on March 24, 2016, the General Administration of Customs issued the Announcement No. 20 of 2016 on the Revision of the "Customs Declaration Filling Standards for Import and Export Goods of the People's Republic of China," adding sections for "Special Relationship Confirmation" and "Price Impact Confirmation."
According to the revised declaration filling standards, since March 30, 2016, companies are required to proactively declare and disclose whether there is a special relationship between the buyer and seller in their import transactions, and whether this special relationship affects the transaction price.
III. Determination Method for the Assessed Customs Value of Imported Goods
According to the "Customs Valuation Methods for Import and Export Goods of the People's Republic of China (2013)" (hereinafter referred to as the "Valuation Method"), the assessed customs value of imported goods is determined by the customs based on the transaction price of the goods, and should include the transportation and related costs, insurance fees incurred before the goods are unloaded at the place of importation within the territory of the People's Republic of China.
01 Transaction Value Method
What is the transaction value method?
The transaction value of imported goods refers to the total amount actually paid or payable by the buyer to the seller for the importation of the goods into the territory of the People's Republic of China, adjusted in accordance with the relevant provisions of the transaction value adjustment items, including direct and indirect payments.
The transaction value of imported goods should meet the following conditions:
(i) There should be no restrictions on the buyer's disposal or use of the imported goods, except for restrictions stipulated by laws and administrative regulations, restrictions on the sales area of the goods, and restrictions that do not have a substantial impact on the price of the goods;
(ii) The price of the imported goods should not be subject to conditions or factors that make the transaction price indeterminable;
(iii) The seller should not directly or indirectly obtain any benefits arising from the buyer's sale, disposal, or use of the imported goods, or if there are benefits, they should be adjustable according to the provisions of the transaction value adjustment items;
(iv) There should be no special relationship between the buyer and seller, or if there is a special relationship, it should be proven that it has not affected the transaction price.
The following situations should be considered as restrictions on the buyer's disposal or use of imported goods:
(i) Imported goods can only be used for display or free distribution;
(ii) Imported goods can only be sold to designated third parties;
(iii) Imported goods, after being processed into finished products, can only be sold to the seller or designated third parties;
(iv) Other situations determined by customs review as restrictions on the buyer's disposal or use of imported goods.
The following situations should be considered as conditions or factors that make the transaction price of imported goods indeterminable:
(i) The price of imported goods is determined on the condition that the buyer purchases a certain quantity of other goods from the seller;
(ii) The price of imported goods is determined on the condition that the buyer sells other goods to the seller;
(iii) Other situations determined by customs review as conditions or factors that affect the price of the goods and make the transaction price indeterminable.
How to handle when the transaction value method is not applicable
When the transaction price of imported goods does not comply with the relevant provisions of the transaction value method, or when the transaction price cannot be determined, the customs, after understanding the relevant circumstances and conducting price negotiations with the taxpayer, will determine the assessed customs value of the goods in the following order:
(i) The transaction value method for identical goods;
(ii) The transaction value method for similar goods;
(iii) The deductive price method;
(iv) The computed price method;
(v) The reasonable method.
After the taxpayer provides relevant information to the customs, they may apply to reverse the order of application of the third and fourth methods mentioned above.
02 Deductive Price Method
The deductive price method refers to the customs' valuation method for determining the assessed customs value of imported goods by deducting related expenses incurred within the territory based on the sales price of the imported goods, identical, or similar imported goods sold within the territory. The sales price should meet the following conditions:
(i) It is the price at which the goods, identical, or similar imported goods are sold within the territory at the same time or approximately the same time as their importation;
(ii) It is the price at which the goods are sold in the state they were imported;
(iii) It is the price at which the goods are sold at the first stage of sale within the territory;
(iv) It is the price at which the goods are sold to unrelated parties within the territory;
(v) The total sales volume of goods sold at this price is the largest.
When determining the assessed customs value of imported goods according to the deductive price method, the following items should be deducted:
(i) The usual profits and general expenses (including direct and indirect expenses) and the usual commissions paid when selling goods of the same grade or kind at the first stage of sale within the territory;
(ii) The transportation and related expenses, insurance fees incurred after the goods arrive at the place of importation within the territory and are unloaded;
(iii) Import duties, customs duties collected on behalf of import links, and other domestic taxes.
If the goods, identical, or similar goods are not sold within the territory in the state they were imported, at the request of the taxpayer, the sales price of the goods after further processing can be used to determine the assessed customs value, provided that the processing value increment is deducted simultaneously.
The aforementioned processing value increment should be calculated based on objective and quantifiable data related to processing costs, recognized standards, calculation methods, and other industry practices in the industry.
When determining the deductible items, principles and methods consistent with domestically recognized accounting principles should be used.
03 Computed Price Method
The computed price method refers to the customs' valuation method for determining the assessed customs value of imported goods based on the sum of the following items:
(i) The cost of materials used in the production of the goods and processing costs;
(ii) The usual profits and general expenses (including direct and indirect expenses) for selling goods of the same grade or kind within the territory;
(iii) The transportation and related expenses, insurance fees incurred before the goods arrive at the place of importation within the territory and are unloaded.
When determining the assessed customs value of imported goods according to the above provisions, the customs may verify the information provided by the overseas manufacturer in the overseas territory with the consent of the overseas manufacturer and after notifying the relevant national or regional government in advance.
When determining the relevant value or expenses according to the above provisions, principles and methods consistent with the recognized accounting principles of the producing country or region should be used.
04 Reasonable Method
The reasonable method refers to the customs' valuation method for determining the assessed customs value of imported goods based on objective, fair, and unified principles, using objective and quantifiable data when the customs cannot determine the assessed customs value according to the transaction value method, the transaction value method for identical goods, the transaction value method for similar goods, the deductive price method, and the computed price method.
When using the reasonable method to determine the assessed customs value of imported goods, the customs must not use the following prices:
(i) The sales price of goods produced within the territory and sold within the territory;
(ii) The Higher of the Available Prices;
(iii) The sales price of goods in the export market;
(iv) The price of identical or similar goods calculated based on values or expenses other than those stipulated by the "Computed Price Method";
(v) The sales price of goods exported to a third country or region;
(vi) The minimum price or arbitrary, fictitious prices.
IV. Sinobravo Reminder
Companies should, when declaring customs for imported goods, select and report the corresponding transaction method code based on the actual transaction price terms of the imported goods, in accordance with the customs-regulated "Transaction Method Code Table." There are a total of seven transaction methods, which are CIF, C&F, FOB, C&I, Market Price, Consignment, and EXW.
The commonly used methods include CIF, C&F, FOB, and EXW, with their corresponding international trade term explanations summarized in the table below. In practice, when the declared transaction method for a company's import business is C&F, FOB, or EXW, the company should fully declare the freight, insurance, and miscellaneous fees it bears to the customs as part of the assessed customs value of its imported goods.
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