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When it comes to multinational business operations, Transfer Pricing (TP) arrangements are important aspects of taxation for this kind of company. These arrangements involve Chinese subsidiaries making royalty and license fee payments to their foreign parent companies. While the primary concern in TP compliance activities is typically tax implications, there's a critical factor that is often overlooked: China Customs.
Many multinational corporations that invest in China and engage in royalty and license fee transactions fail to consider customs issues early in the process and lack appropriate documentation and procedures. This condition may lead to unexpected compliance risks, including potential penalties imposed by China Customs.
There's a prevalent misconception that royalty and license fees fall solely under the competence of the State Administration of Taxation and have no connection to Customs authorities. Customs is often associated with tangible goods and articles. However, this is not entirely accurate since China Customs does have the authority to regulate and tax royalties and license fees in specific scenarios.
China Customs Laws and Regulations
According to Article 13 of the Order of the General Administration of Customs of the People's Republic of China, it is required to add royalty and license fees to the transaction value of imported goods if they are related to such goods and if they are a condition for their sale. Once incorporated into the transaction value, they contribute to the Customs value used to calculate Customs duty, VAT, and, for certain commodities, excise taxes.
Importers are also required to declare whether they've paid royalties and license fees for the imported goods. Failing to make truthful declarations can expose them to administrative penalties.
Analyzing the Challenges
Determining whether royalties and license fees are related to imported goods and paid as a condition of sale is a complex legal question. The abstract provisions, paired with complex business models and different product types, make it challenging to differentiate between dutiable and non-dutiable fees.
Additionally, different business arrangements can complicate matters more, as a payment item considered part of the transaction price in one scenario may not be dutiable in another.
Recent Enforcement Trends
China Customs has intensified its scrutiny of licensing fees, royalties, and transfer pricing in recent years. Routine inspections have been complemented by industry-wide Customs auditing campaigns, targeting various sectors. Many multinational enterprises have undergone audits, leading to significant tariff and tax claims. In some instances, administrative penalties have also been imposed, impacting Customs ratings.
As China Customs shifts from merely overseeing consignments to regulating entire enterprises, Customs compliance risks are on the rise. The agency is able to monitor closely companies' foreign currency payments due to established mechanisms of information exchange with the State Administration of Foreign Exchange.
In light of these developments, multinationals investing in China must prioritize Customs compliance alongside their TP and tax strategies. A proactive approach, supported by comprehensive documentation and legal analysis, is crucial to avoid unexpected compliance risks and penalties.
At PHC Advisory we stay updated on the relevant news on business matters in the PRC. Feel free to follow our channel and contact us at info@phcadvisory.com if you have any inquiries or if you need accounting and tax compliance services.
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Disclaimer
The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not create any legal obligations between PHC Advisory and the reader.
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