China Customs recently requires the declaring party of import or export transactions declare the impact on the import or export price of its special relationship with the counterpart (“Price Impact”). Specifically the declaring party must state whether its special relationship, if any, would affect the transaction value or price as declared to the China Customs. Previously the special relationship was a declarable item subsequent to a specific request from the Customs, and yet the impact of the special relationship has never been an item of declaration. Besides, the declaration party had a general defense right to disprove such Price Impact. The existence of Price Impact will trigger the power of the Customs to re-value the given import shipment.
However, such defense is impaired by the new requirement by China Customs. As the declaring party has the duty to declare the Price Impact for each import or export shipment. Accordingly the declaring party has to guarantee absolute correctness of such declaration of Price Impact, and bear the administrative or even criminal consequences of incorrect declaration.
The request for declaring Price Impact originates from a recent Circular 20 (2016), proclaimed on March 24, 2016 by Administration of General Customs of PRC (“GAC”). Under Circular 20, the declaring party has to declare and affirm Item 44 – Affirmation of Price Impact. If the declaring party cannot show that the import or export price or value is approximate to the value of identical or similar goods, or of the value out of deduction method or computing method under Circular 213 (which is a customs valuation regulation), the declaring party must declare existence of such impact by confirming “Yes” on the declaration document; otherwise, declare non-existence of such impact by stating “No”.
We believe such price impact declaration requirement embodies serious legal problems as follows:
In the first place, pursuant to the official commentary on Article 1 of WTO Agreement on Customs Valuation (“WTO Agreement”) and Article 44 of Circular 213, China Customs shall have reasonable grounds to pose written query against the transfer price. Only under such circumstances shall the declaring party confirm whether such special relationship has an impact on the import or export price. The declaring party also has the option not to so confirm, with the possible consequence of customs revaluation of the import or export transfer price for the given shipment. The mere special relationship shall not be a reason of the customs query against import or export price or of forced affirmation by the declaring party of the Price Impact.
However, according to the new Circular 20, each import or export shipment between related parties will be subject to declaration of Price Impact when the Customs have no grounds for a price query or even the Customs poses no query at all. This is certainly in violation of the WTO Agreement and Article 44 of Circular 213.
Secondly, under Circular 213, the declaring party will have the RIGHT to disprove Price Impact of the special relationship within the maximum 15 days when China Customs issues a written price query. Prior to a written price query, the declaring party does not have obligation to affirm or disprove the Price Impact of the special relationship. Pursuant to Circular 20, however, the declaring party shall state if the special relationship has affected the declared price at the instant time of import or export, which is obviously repugnant to the mandatory procedure of written price query which shall be in place under Circular 213 before the declaring party is requested to explain (rather than declare) whether the Price Impact exists. As a legislative matter, Circular 20 as operating rules is not in a position to alter Circular 213, a customs regulation in nature. Such repugnancy would inevitably trigger chaos in customs revaluation practice concerning cross-border transfer pricing transactions. Furthermore, in case the declaring party declares and confirms such Price Impact, China Customs will have the legal obligation to advance written price query and revalue each shipment as far as possible, so as to avoid its risk of liabilities for omission, meanwhile the declaring party possibly loses its right of rebuttal given its affirmation of Price Impact at the time of declaring the import or export shipments.
Thirdly, on the basis of Article 8 of Circular 213, the circumstances of sales can be considered in determining whether such Price Impact exists. However, Circular 20 does not permit without sound reason consideration of such defense on the part of the declaring party.
Fourthly, the essence of requiring declaration of Price Impact is to turn the defense right to disprove Price Impact under Circular 213 into an absolute declaring obligation. It is irrational for Circular 20 to require the declaring party to declare such a defense right under Circular 213 as the declaring party only has an obligation to declare the true conditions of the import or exports rather than a defense right.
Lastly, determination of Price Impact is a matter of both complex legal and technical judgment, which cannot be easily settled at the time of importation or exportation. It is manifestly not a reasonable requirement to declare Price Impact on transfer price for each import or export shipment, as the declaring party cannot possibly ensure correctness of such declaration within very limited timeframe.
As revealed in HaoLiWen’s experience of advising transfer pricing related matters, it is generally very difficult for multinational companies to determine if a special relationship has affected the declared price, as it both provokes the WTO Agreement and customs valuation on the one hand, the the OECD Transfer Pricing Guidelines on the other, which are totally two different creatures in practice. Consequently, Price Impact determination and declaration will substantially impede customs clearance efficiency of the import or export shipments of the declaring party.
The declaring company shall also note that imprudent declaration of “No Price Impact” may trap the declaring party into false declaration and accumulative non-compliance liabilities. It is easy for China Customs to conclude “constructive existence” of Price Impact under Circular 213 when the declaring party cannot show a declared price is proximate to the price of identical or similar goods or the price out of the deduction or computing method prescribed under Circular 213 itself. If such constructive existence occurs, the scope and consequence of the declaring party’s liabilities would depend on China Customs’ ability to find “objective and quantified” data to reach a revaluation price, as well as to seek evidence of intentional incorrect declaration of “No Price Impact”. Ironically if “Yes” is declared for Price Impact and China Customs finds out no such impact, would China Customs penalize the declaring party for such incorrect declaration?
As declaration is a legal obligation which can be a source of non-compliance, customs auditors and even anti-smuggling officials would often participate in cases of customs valuation of transfer pricing.
As a conclusion, given the requirement under Circular 20, the declaring party shall bear the consequence of customs valuation of each import and export shipment if it declares “No Price Impact”, or can alternatively declare “No Price Impact” at the risk of accumulative liabilities.
From the legal perspective, we believe the requirement of declaring Price Impact under Circular 20 violates the gist of both WTO Agreement and Circular 213 on the one hand, and lacks reasonability and impedes simplified customs supervision objectives on the other. Such a requirement shall be revoked or alternatively accommodate such declaration as “unable to determine” the Price Impact.