12 June, 2016
From 30 March 2016, importers and exporters are required to provide additional information when making customs declarations in China which could result in further scrutiny from Customs on the valuation of imported goods.
Pursuant to the Amendments to the Standards of PRC Customs for the Completion of Import and Export Customs Declaration Forms issued by the General Administration of Customs (“GAC”) and effective from 30 March 2016 (“Announcement No. 20”), GAC amended the types of information that importers and exporters are required to provide when making customs declarations. Among the various additional items, the following items are of particular concern:
- Whether there is a special relationship between buyer and seller in the transaction;
- Whether the special relationship influenced the transaction value; and
- Whether there are any royalty payments.
1. Declaring the existence of a “special relationship”
Importers and exporters are required to indicate whether a special relationship exists between the buyer and the seller in an import or export transaction. A special relationship exists if any of the following circumstances are met:
- Both seller and buyer are members of the same family;
- Either seller or buyer is a senior officer or director of the other;
- One party is controlled, either directly or indirectly, by the other;
- Both seller and buyer are controlled, either directly or indirectly, by the same third party;
- Seller and the buyer, either directly or indirectly, control a third party together;
- One party, either directly or indirectly, possesses, controls or holds 5% or more of the voting stocks or shares publicly issued by the other;
- One party is the employee, senior officer or director of the other;
- Both buyer and seller are members of a partnership; or
- Where seller and buyer are linked to each other in the business, e.g., one party is the sole agent, sole distributor or sole assignee of the other party, and any of the above conditions are met.
2. Declaring whether the special relationship influenced transaction value
If a special relationship exists based on the criteria set out above, importers or exporters are required to declare whether the special relationship influenced the transaction value of the imported or exported goods.
Announcement No. 20 provides that importers and exporters are to indicate that the special relationship influenced the transaction value declared if the importers or exporters are unable to provide evidence that the declared value approximate any of the following test values:
- The transaction value of identical or similar goods sold to third party buyers in the PRC;
- The dutiable value of identical or similar goods calculated based on the deductive value method; or
- The dutiable value of identical or similar goods calculated based on the computed value method.
Please note that the test values are to be applied in the manner set out in the Measures of Customs of the People’s Republic of China on Determining the Dutiable Value of Imports and Exports issued by GAC and effective since 1 February 2014 (“Order 213”).
Announcement No. 20 is silent as to whether the circumstances of sale test as set out in Order 213 may be used when determining whether the special relationship influenced the declared transaction values.
3. Declaring whether there are royalty payments
Importers and exporters are required to declare royalty payments that are related to imported and exported goods. In this regard, the types of royalty payments are very wide and include payments for trademarks, patents, copyrights, and distribution rights.
Please note that Announcement No. 20 is silent as to whether the royalty payments also need to be a condition of sale of the imported goods before the declaration needs to be made.
4. How we can assist
We expect these new changes to enable Customs to increase scrutiny over the customs valuation of goods. This is a continuation of the trend towards more aggressive Customs audits and investigations in China, especially in relation to inter-company pricing and royalty issues.
To help prepare importers and exporters for the changes discussed, our dedicated team of customs and trade attorneys are able to assist with:
- reviewing transfer pricing policies and the basis for determining their inter-company prices to determine whether they will withstand scrutiny by Customs;
- reviewing royalty arrangements to ascertain whether they need to be declared and, if so, whether they are dutiable in China;
- preparing documentation to justify compliance of inter-company prices with China’s customs valuation regulations and the non- dutiability of royalty payments;
- reviewing third party logistics agreements and import / export agent agreements to provide protection for importers and exporters in respect of valuation information declared to Customs;
- where changes to inter-company prices or royalty arrangements are required to be made, assisting with managing these changes and voluntary disclosures (if necessary); and
- assisting with responses to Customs in the event of valuation inquiries.
For further information, please contact:
Mini vandePol, Global Head of Compliance & Investigations Group, Baker & McKenzie
mini.vandepol@bakermckenzie.com
