Tax and Finance Series: The Impact of Special Relationships on the Assessed Customs Value of Imported Goods (Part Two)

For cross-border related goods trade within multinational corporate groups, in addition to the tax risks associated with transfer pricing, it is also essential to pay attention to the impact of customs' price review on imported goods. Among these, confirming special relationships and their impact on pricing is of utmost importance.

In our previous article, we provided a theoretical introduction to the four methods for determining the customs value of imported goods. This article will focus on how special relationships affect the customs value of imported goods, how enterprises can voluntarily declare and disclose special relationships to customs, and the consequences of inaccurate declarations. We will provide detailed guidance on how to handle these matters in practice.

What Constitutes a Special Relationship?

According to Article 16 of the "Customs Valuation Methods," the following circumstances shall be deemed to indicate the existence of a special relationship between the buyer and the seller:

(i) The buyer and the seller are members of the same family;

(ii) The buyer and the seller are senior business executives or directors of each other;

(iii) One party is directly or indirectly controlled by the other;

(iv) Both the buyer and the seller are directly or indirectly controlled by a third party;

(v) The buyer and the seller jointly control a third party, either directly or indirectly;

(vi) One party directly or indirectly owns, controls, or holds more than 5% (including 5%) of the publicly issued voting shares or stock of the other;

(vii) One party is an employee, senior executive, or director of the other;

(viii) The buyer and the seller are members of the same partnership.

If the buyer and the seller have a business connection, such as one being the exclusive agent, exclusive distributor, or exclusive consignee of the other, and they meet the aforementioned conditions, they should also be considered to have a special relationship.

How to Determine Whether a Special Relationship Affects the Transaction Price?

According to Article 17 of the "Customs Valuation Methods," if there is a special relationship between the buyer and the seller, but the taxpayer can prove that the transaction price is close to any of the following prices occurring at the same time or approximately the same time, it should be considered that the special relationship has not affected the transaction price of the imported goods:

(i) The transaction price of the same or similar imported goods sold to a buyer in the country without a special relationship;

(ii) The customs value of the same or similar imported goods determined according to the "deductive value method" stipulated in Article 23 of the "Customs Valuation Methods";

(iii) The customs value of the same or similar imported goods determined according to the "computed value method" stipulated in Article 25 of the "Customs Valuation Methods."

When using the above prices for comparison, customs should consider differences in commercial levels and import quantities, as well as cost differences caused by the existence or absence of a special relationship between the buyer and the seller. Additionally, according to Article 18 of the "Customs Valuation Methods," if customs, after reviewing the circumstances related to the sale of the goods, deems them to be in accordance with general commercial practices, it can determine that the special relationship has not affected the transaction price of the imported goods.

Sinobravo Reminder:

Regarding whether a special relationship affects the transaction price of imported goods, the taxpayer bears the burden of proof. To cope with customs inspections, enterprises should retain supporting documents that prove the authenticity and accuracy of their declared prices or that the special relationship between the buyer and the seller has not affected the transaction price during their daily operations, for customs inspection.

How Can Enterprises Voluntarily Declare and Disclose Special Relationships to Customs?

According to the customs declaration form filling specifications, if there is a special relationship between the buyer and the seller, "Yes" should be filled in the import customs declaration form; otherwise, "No" should be filled in. If there is a special relationship, it is also necessary to confirm whether the special relationship affects the transaction price of the imported goods. If the taxpayer can prove that the special relationship has not affected the transaction price, "No" should be filled in; otherwise, "Yes" should be filled in.

How Does Customs Review and Determine the "Customs Value"? What Is the Related Valuation Process?

The customs review and determination of the customs value procedure includes the price inquiry procedure and the price negotiation procedure. When customs has doubts about the authenticity and accuracy of the declared price, or believes that the special relationship between the buyer and the seller affects the transaction price, the price inquiry procedure should be initiated.

The taxpayer or its agent should provide relevant materials or other evidence in writing to prove the authenticity and accuracy of the declared price or that the special relationship between the parties has not affected the transaction price within 5 working days from the date of receiving the "Price Inquiry Notice" issued by customs. If there is a valid reason that prevents the provision of the aforementioned materials within the specified time, an extension can be applied for in writing to customs before the expiration of the specified period. Except in special circumstances, the extension shall not exceed 10 working days.

After issuing the "Price Inquiry Notice," if any of the following circumstances occur, customs may initiate the price negotiation procedure and determine the customs value in sequence using the same, similar, deductive, computed, and reasonable estimation methods after full consultation with the taxpayer:

(i) The taxpayer or its agent fails to provide further explanation within the time limit set by customs;

(ii) After the taxpayer or its agent provides relevant materials and evidence, customs, after reviewing the provided materials and evidence, still has reason to doubt the authenticity and accuracy of the declared price;

(iii) After the taxpayer or its agent provides relevant materials and evidence, customs, after reviewing the provided materials and evidence, still has reason to believe that the special relationship between the buyer and the seller affects the transaction price.

The taxpayer should engage in price negotiation with customs and fill in the "Price Negotiation Record Form" within 5 working days from the date of receiving the "Price Negotiation Notice" issued by customs. If the taxpayer fails to negotiate within the specified time limit, it is considered to have waived the right to price negotiation, and customs may directly determine the customs value in sequence using the aforementioned five non-transaction price methods.

After customs determines the customs value of the imported goods, the taxpayer may submit a written application, requesting customs to provide a written explanation of how the customs value of its imported goods was determined. Customs should issue a "Valuation Notice" according to the request.

What Are the Penalties for Inaccurate Price Declaration of Imported Goods?

Article 15, Paragraph (4) of the "Regulations on the Implementation of Administrative Penalties by the Customs of the People's Republic of China"

If the name, tariff code, quantity, specifications, price, mode of trade, country of origin, place of departure, place of arrival, final destination, or other items that should be declared for imported or exported goods are not declared or are declared inaccurately, affecting the collection of national taxes, a fine of more than 30% but less than twice the amount of the unpaid taxes shall be imposed, and any illegal gains shall be confiscated.

Article 17 of the "Regulations on the Implementation of Administrative Penalties by the Customs of the People's Republic of China"

If a customs declaration enterprise or customs declarant fails to reasonably review the authenticity of the information provided by the consignor, or if negligence in work leads to the occurrence of the circumstances stipulated in Article 15, a fine of up to 10% of the value of the goods may be imposed on the customs declaration enterprise, and its customs declaration activities may be suspended for up to six months; in serious cases, it may be prohibited from engaging in customs declaration activities.

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