Part 1 of this two-part series summarizes the latest 2018 version of the Guide to Customs Valuation and Transfer Pricing released by the World Customs Organization ("WCO"). Part 2 will comment on trends and observations in the interaction between customs valuation and transfer pricing from a China perspective.
In recent years, transfer pricing has been one of the key areas of focus for China customs as to whether the prices of imported goods have been influenced by the relationship between the buyer and the seller. China customs has taken a couple of initiatives to scrutinize transfer pricing for cross-border transactions.
For example, starting from July 1, 2017, customs established three National Supervision Centers for Duty Collection to organize professionals within the customs organization to conduct investigations and audits on import prices of selected industry sectors.
Further, China’s General Administration of Customs ("GAC") has entered into a memorandum of information sharing with the State Administration of Taxation ("SAT") and the State Administration of Foreign Exchange ("SAFE") to manage the tax and customs issues arising from cross-border payment and transfer pricing.
At the same time, Chinese tax authorities have also become more sophisticated in scrutinizing transfer pricing of cross-border transactions carried out by multinational enterprises ("MNEs").
However, due to inherent conflicting interests between the tax and customs’ authorities, MNEs often face the challenge of a discrepancy between the two authorities in terms of pricing of imports from and/or exports to overseas related parties. As a result, MNEs increasingly need to seek clarity and certainty in China on the treatment of transfer pricing on imported goods.
It is our observation that, more than ever, customs officials in China are willing to understand the transfer pricing methodologies and analysis approach adopted by the Chinese tax authorities, and to consider relevant guidance and cases from the WCO in their valuation of related party pricing of imported goods.
Highlights and Key Changes of 2018 Edition of WCO Guide
In June 2018, the WCO released an update to its Guide to Customs Valuation and Transfer Pricing, (the “Guide") which was last updated in 2015. The Guide is available from the WCO website (English and Spanish versions only).
The WCO Guide is a primary source of reference for both customs authorities and businesses on tax and customs practices with respect to transfer pricing and customs valuation.
As a member of the WCO, China makes reference to the WCO guidance in its local rules and practice. It is therefore important to understand the latest edition of the WCO guidance and its potential impact on companies which import from overseas into China.
The 2018 edition of the Guide follows the framework of the previous version and is outlined below.
Chapter 1: Introduction, including “Who should read this Guide”, “What is the issue,” and “What are the benefits.”
Chapter 2: Customs valuation and related party transactions, provides a background to customs valuation methodology, “Test Values” and “Circumstances Surrounding the Sale” of related party transactions, transaction value and alternative valuation methods.
Chapter 3: An introduction to transfer pricing, covers the definition of transfer pricing, history and current state of play, the legal framework, the arm’s length principle and its application in practice, dispute avoidance and resolution, selected practical issues and transfer pricing compliance.
Chapter 4: Linkages between transfer pricing and customs valuation, covers the background to the issue and the practical use of transfer pricing documentation. This chapter also introduces the joint WCO-OECD conferences/WCO focus group, and highlights the work of the technical committee on customs valuation, the WCO cooperation with the Organisation for Economic Co-operation and Development (“OECD”) and World Bank Group, as well as private sector views.
Chapter 5: Using transfer pricing information to examine related party transactions, discusses the examination of circumstances surrounding the sale via the use of transfer pricing documentation and customs valuation treatment of adjustments to the declared customs value.
Chapter 6: Raising awareness and closer working, primarily sets out good practice for customs valuation policy managers, business and tax administrations.
Appendices: There are 11 appendices, including national initiatives, commentary and case studies from the technical committee on customs valuation, and examples of transfer pricing documentation structure.
Although no major revisions were made, notable updates include the following:
- References to developments in the OECD base erosion and profit shifting ("BEPS") initiatives which aim to combat tax avoidance strategies utilizing low-tax jurisdictions. This includes references to OECD BEPS actions 8, 9 and 10 and updated guidance on the use of the transactional profit split method in Chapter 3.
- Specific references to the two case studies previously considered and issued by the WCO’s technical committee on customs valuation in Chapter 4; case study 14.1, that applies the transactional net margin method ("TNMM") and case study 14.2 that applies the resale price method.
- A contribution from Korea concerning its practice on the interaction of customs valuation and transfer pricing in Annex I, “National initiatives.”
As with the previous version, the updated guide notes that it does not provide definitive approaches to deal with customs valuation or transfer pricing issues, but rather provides only technical background and presents potential solutions that should be used in conjunction with domestic laws. However, the guide continues to serve as a main reference in the coordination of tax and customs practices with respect to related party pricing analyses.
Part 2 of this Insight will look at regulations and practice in China relevant to customs valuation and transfer pricing.
Dolly Zhang is a Partner of Deloitte China specializing in global trade advisory; Mandy Yu is a Director of Deloitte China transfer pricing services; Roger Chen is a Senior Manager of Deloitte China global trade advisory, all based in the Shanghai office.
Any errors or omissions are the authors’ and this article is written in the personal capacity of the authors. Neither the authors nor the global Deloitte organization—nor any of its member firms—can accept the responsibility for any loss related to any person acting on the information in this article.