EY - Recent experiences on interaction between transfer pricing and customs valuation

Transfer Pricing Tax Alert: August 2014

Recent experiences on interaction between transfer pricing and customs valuation

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If your company imports goods into China from related parties then you may have already, or likely will in the future, receive a request from China Customs to provide information in support of the declared import prices. 

There are new developments in the China customs valuation regulations (i.e., Decree No. 211 and 213) and continued discussions at a global level between the World Customs Organization1 (“WCO”) and the OECD about the relevance of how/whether a Transfer Pricing Documentation Report (“TPD Report”) could be used by importers to support the arm’s length nature of the import prices through the “circumstances surrounding the sale”2 test.

Although, it is still early days for this topic in China, the China Authorities are starting to evaluate whether the TPD Report contents can be used to support declared import prices. Companies need to be ready to respond to requests for information from China Customs.

When doing so it is important to understand that any submitted information, such as a TPD Report, can either support a position or may result in additional questions about the pricing that can lead to potential assessments of import taxes and penalties. EY China has seen an increase in such risks during the last few months.

How can the import prices be supported?

A majority of China import taxes (i.e., customs duty, import VAT, import consumption tax, anti-dumping, and others) are based upon ad-valorem rates and the tax revenue collected by China Customs is directly affected by the declared customs values. China Customs are concerned that related parties may have declared lower import prices and as a result underpaid related import taxes.

Consequently, China Customs has the authority and right to ask importers to explain and defend why their import prices should be acceptable and in compliance with the customs valuation regulations. How can the import prices be supported?

One question frequently asked of late is “whether a TPD Report prepared for corporate income tax purposes can be used in front of China Customs to support import prices?” While WCO Commentary 23.1 points out that “the TPD Report submitted by an importer may be a good source of information”, it also goes on to state it “may not be relevant or adequate in examining the circumstances surrounding the sale because of the substantial and significant differences which exist between the methods in the Agreement to determine the value of the imported goods and those of the OECD Transfer Pricing Guidelines”.


1 See WCO Commentary 23.1 on: Examination of the expression “circumstances surrounding the sale” under Article12.(a) in relation to the use of transfer pricing studies.

2 This is a customs valuation related concept for companies to help them support that the relationship did not influence the price and that the prices are “arm’s length”.