Customs Valuation Audit Mechanics for Cross Border Agency Import Transactions
Customs valuation in agency imports depends on proving buying commission exemptions under Decree 213 while adjusting for assists and royalties.
Special Relationship Valuation Test
Meaning
The regulatory inquiry evaluates whether the transactional price between related business entities has been influenced by their corporate relationship. The special relationship valuation test is used by customs authorities to decide if the declared transfer price can be accepted as the duty-paying value. This test is designed to prevent multinational companies from shifting profits or reducing customs duties through artificially low pricing.
It ensures fair valuation among related parties.
Relationship Assessment
Evaluating the connection between contracting parties is essential to ensure that pricing is not manipulated. Under the special relationship valuation test, parties are considered related if they share common ownership, directorships, or familial ties. Customs rules define these connections precisely.
If a relationship is identified, the burden of proof shifts to the importer to show that the price is at arm’s length.
Price Comparison
Importers can prove that their prices are arm’s length by comparing them to benchmark transactions. Under the special relationship valuation test, the importer must show that the transfer price is close to the transaction value of identical or similar goods sold to unrelated buyers in China. This involves using deductive or computed value methods.
Importers can also demonstrate that the price is settled in a manner consistent with normal industry pricing practices or covers all costs plus a reasonable profit.
Compliance Burden
Defending a transfer pricing methodology before authorities requires a substantial administrative effort. If the importer fails the special relationship valuation test, customs will reject the transaction value and reassess the duty-paying value using alternative methods. This reassessment often leads to higher duties and interest charges.
Importers must maintain a comprehensive transfer pricing study that justifies their pricing methodology. This documentation must be updated annually. It is a critical part of the company’s defense during a customs valuation audit.