Transfer Pricing News Issue 41 - December 2022

Shenzhen customs, tax authorities to collaborate on transfer pricing of related-party imported goods

Customs and tax authorities in Shenzhen, China, jointly issued a notice on the collaborative management of transfer pricing of goods imported from overseas related parties.


Under China’s current tax and customs regulatory regime, both customs and tax authorities have the right to assess the import price for goods imported from overseas related parties. However, due to different regulatory bases and different areas of focus in these two departments, when reviewing the same related-party transaction, the final assessments can be considerably different.

In past transfer pricing cases, the customs authorities have been primarily concerned with whether the transfer price of imported goods is too low, resulting in a loss of customs duties, whereas the tax authorities are mainly concerned about whether the import price is too high, eventually leading to smaller taxable profits in China.

For these reasons, many multinational enterprises (MNEs) have long faced the issue of double recognition and double taxation associated with the transfer pricing of goods imported from overseas related parties.

New Notice

On 18 May 2022, the Shenzhen tax and customs authorities jointly launched a notice “on Matters Regarding the Collaborative Management of Transfer Pricing of Related-Party Imported Goods” (Shen Tariff [2022] No.620. The notice introduces a framework of cross-departmental collaboration between the Shenzhen tax bureau and the customs authorities in the matter of coordinated evaluation and management of goods price for related-party imports.

According to the notice, an enterprise that meets the application requirements is eligible to apply for an advance import price collaboratively negotiated and approved by both the tax authorities and the customs authorities.

The notice -- the first of its kind in China -- is intended to reduce taxpayer compliance costs caused by double recognition and double taxation, and to improve transfer pricing compliance certainty and management efficiency of customs and tax authorities.

Qualifications required

The notice applies to Shenzhen enterprises that meet the conditions under Article 4 of the “Interim Administrative Measures on Advance Rulings of the General Administration of Customs” (hereinafter referred to as “Order No.236 of the GAC”) and Article 4 of the “Announcement of the State Administration of Taxation on Improvements to Matters Relating to Administration of Advance Pricing Arrangements” (“Announcement No.64 of the SAT”).

  1. Order No.236 of the GAC: The applicant should be a foreign trade business operator that has actual import and export activities and is registered with Customs.
  2. Announcement No.64 of the SAT: The applicant’s related-party transaction amounts should exceed RMB 40 million in each of the three years prior to the tax year in which the competent tax authorities deliver to the enterprise the “Notice of taxation matters” on the authorities’ intention to negotiate and sign an advance pricing arrangement.

Procedure for applying the collaborative transfer pricing management

Step 1: Application and acceptance

An enterprise submits an application form to the in-charge Shenzhen Customs Authorities and Shenzhen Taxation Bureau at the same time.

The in-charge departments will collaboratively assess and determine the applicant’s qualifications within 10 days after receiving the application form. Once approved, the acceptance opinions along with the application form will be sent back to the applicant.

If the in-charge departments find the submitted information is incomplete during assessment, they will offer a one-off notification that requires the applicant to make corrections within five days.

Step 2: Evaluation and consultation

Within 15 days of acceptance of the application, the Shenzhen Customs Authorities and the Shenzhen Taxation Bureau will start a collaborative evaluation and negotiation with the applicant regarding the advance import price of related-party goods. During the evaluation process, the applicant is obligated to submit supplementary documents at the request of either department. The Shenzhen Customs Authorities and the Shenzhen Taxation Bureau may independently or jointly conduct an on-site inspection of the applicant.

Step 3: Signing of memorandum

Once both departments reach a consensus through collaborative evaluation and negotiation, the legal representatives of the three parties or their authorized representatives will jointly sign a “Memorandum of collaborative management” (hereinafter, “the Memorandum”). At the same time, Shenzhen Customs will issue an advance price ruling to the applicant, and Shenzhen Tax Bureau will sign an advance pricing arrangement with the applicant.

If both departments cannot reach consensus, the procedure will be terminated and the in-charge department will issue a formal notice of termination to the applicant.

Step 4: Implementation of memorandum

The memorandum’s applicable covered period is three calendar years. During the covered period, the enterprise will adjust the price of goods based on the terms of the memorandum, and the Shenzhen Tax Bureau and the Shenzhen Customs Authorities will then perform corresponding procedures to confirm whether the adjustments comply with the prevailing customs and tax regulatory frameworks.

If the enterprise fails to comply with the agreed terms, or the terms cannot be applied due to substantial changes to the business or to the covered transactions, or upon the application of the enterprise, the Shenzhen Tax Bureau and the Shenzhen Customs Authorities may negotiate to revise or terminate the memorandum.

During the covered period, the enterprise is required to submit annual reports that include information regarding its annual business operation and implementation of the memorandum within six months after the end of each year.

Step 5: Expiration and renewal

The memorandum of collaborative management will automatically expire after the covered period expires. Enterprises can apply for renewal within 90 days before the memorandum’s expiration.

BDO China’s insights

The first collaborative arrangement between the Shenzhen Tax Bureau and the Shenzhen Customs Authorities is a milestone development in China’s taxation and customs practice. A successful trial case under the guidance of the notice has been observed in Shenzhen.

The implementation of the notice and a successful trial case provide a positive impact and give confidence to Shenzhen-based enterprises to increase transfer pricing certainty. More Shenzhen enterprises are expected to apply and benefit from the new collaborative management system.

Although this collaborative arrangement is limited to Shenzhen at this time, the notice sets a good example for the rest of China. Whether other tax bureaus and customs authorities will implement similar collaborative arrangements remains to be seen. BDO China will continue to keep an eye on the development of joint management between customs and tax authorities for the transfer price of related-party imported goods in China.

Emily Li

Gordon Gao