China: Shenzhen launches first tax and customs collaborative transfer pricing management mechanism

Tax and customs collaborative transfer pricing management mechanism launched

Tax and customs collaborative transfer pricing management mechanism launched

Under China's current tax and customs management systems, enterprises encounter challenges on their related-party imports, and possibly are subjected to import price adjustments concurrently by two separate authorities.

The Shenzhen Tax Bureau and Shenzhen Customs on 18 May 2022 jointly issued "Notice of Shenzhen Tax Bureau of the State Taxation Administration and Shenzhen Customs on matters regarding the collaborative management of transfer pricing of related-party imported goods.”  

  • This joint notice introduces a framework for collaborative management of transfer pricing of goods imported from related parties in the form of cross departmental co-operation between customs and tax authorities.
  • The notice is intended to resolve the issue of double recognition and double taxation of related-party imports between customs and tax that has long been a challenge for many multinational enterprises (MNEs) and to provide certainty to the management of MNEs’ transfer pricing policies.  

KPMG observation

Professionals with the KPMG member firm in China assisted an MNE in Shenzhen to successfully conclude China's first collaborative transfer pricing management case with the Shenzhen Tax Bureau and Shenzhen Customs.

The MNE was challenged by a non-local customs A on the reasonableness of the price of goods imported from the enterprise’s overseas related party. Every year since then, the enterprise had to adjust its import price and pay import duties in accordance with the requirements of customs A. Additionally, the enterprise had also been questioned by another non-local customs B on the royalties paid by the enterprise, whether they were related to the imported goods (and hence dutiable). Customs B dictated that the enterprise includes the royalty amount in the price of imported goods and pay additional duties. As a result, the enterprise faced the issues of double recognition and double taxation by the customs and tax authorities.

To solve the above difficulty faced by the enterprise and in the absence of any precedents, all parties (the Shenzhen Tax Bureau, Shenzhen Customs, and the enterprise) closely co-operated by leveraging on China’s existing customs and tax supervision systems and effectively reached an agreement on the enterprise’s transfer pricing of imported goods

The pilot case provided practical reference on the feasibility, policy formulation, and specific implementation matters regarding the collaborative management system. The case resolved a number of long-standing issues for the enterprise with respect to the management of related-party import price, thereby reducing the enterprise’s tax compliance costs. The two authorities then launch the collaborative transfer pricing management mechanism following the signing of the agreement among the tax bureau, customs, and the enterprise.

  • In the pilot case, the tax and customs authorities created a channel for negotiation and cooperation between the two parties whereas both would mutually recognize the final results of the negotiation. Through this trial case, the Shenzhen Tax Bureau and Shenzhen Customs formalized a cross-departmental working mechanism for taxpayers.
  • During the negotiation between the Shenzhen Tax Bureau and Shenzhen Customs, the inventive solutions adopted by both authorities on the application of transfer pricing methods, the determination of the audit scope of imported goods, the use of the audit results to solve royalty transactions, and the implementation of the outcome of the negotiation, etc., provided precedents for future cases.

In addition, through the implementation results of this pilot case, the enterprise effectively resolved its double taxation issue of long-standing, reduced its overall tax costs, improved compliance efficiency, as well as enhanced the stability and predictability of its transfer pricing policy implementation. 


As the global economy becomes more integrated, MNE groups tend to allocate and optimize their global supply chains, whereby cross-border related-party transactions become more common. Meanwhile, as China's tax authorities and customs authorities change their tax collection and management methods from ex-ante review to ex-post management, the reasonableness of related-party import pricing has become a reviewed focus of both the tax and customs authorities. In recent years, a growing number of MNEs face the issue of being challenged on their related-party import transactions, resulting in these transactions being subjected to import price adjustments by the two authorities at the same time.

Additionally, to cope with the continuous changes and challenges of internal and external business environment, MNEs often need to review and adjust their business policies and models. Adjustments to the pricing policies of related-party transactions (and the resulting changes in the related-party import prices and profit levels) are often important triggers for tax and customs authorities to launch a transfer pricing review.

Under China's current government management system relating to related-party import transactions, both the tax and customs authorities can review whether the transaction price has complied with the arm’s length principle. However, under the existing regime, the authorities have differing focuses:

  • Customs authorities: The transaction price of imported goods is the main basis for the customs authorities to collect import duties. Therefore, customs officials are concerned with a low import price that would result in a loss of import duties.
  • Tax authorities: The importer’s profits, calculated by reference to its revenue less cost of goods and expenses, are the basis for tax authorities to collect corporate income tax. Therefore, tax authorities focus on whether the import price is too high such that it reduces the profit level of the Chinese importer and the corresponding corporate income tax collection.

Thus, the tax and customs authorities have different concerns when reviewing the same related-party transactions, with both sides exercising their functions independently under the existing customs and tax legal frameworks. In the event that an adjustment is made to an importer’s import price that subsequently affects the corresponding profit level, double recognition and double taxation may occur, especially if there is a lack of communication and mutual recognition between the customs and tax authorities. The lack of coordination between both the authorities is also common in other jurisdictions and could have implications on the development of transnational investment and trade.

If a set of effective tax and customs collaborative management systems for related-party import transaction prices could be introduced—so that the tax and customs authorities can agree to provide an overall consistent review on the related-party import prices as well as profit margins of an enterprise—this could alleviate the issue of double taxation of the enterprise, improve certainty of transfer pricing management by the enterprise, and reduce tax compliance costs.

Points regarding the collaborative management system between Shenzhen tax and customs authorities

The jointly issued May 2022 notice to implement a harmonized approach to managing related-party import transactions provides for both the authorities and the applicant enterprise to jointly sign and implement a memorandum. The memorandum would provide consistent implementation of related-party import pricing, as has mutually been agreed by Shenzhen Tax Bureau and Shenzhen Customs.

Details of the notice including the following: 

  • Legal basis: Under the administrative procedures of China's tax and customs authorities, customs officials are to follow the administrative procedures of advance ruling on import prices as provided for under the "Interim administrative measures on advance rulings of customs of the People’s Republic of China" (Order No. 236 of the General Administration of Customs). Tax bureaus, meanwhile, are to follow the relevant procedures with respect to advance pricing arrangements as set forth in the "Announcement of the State Administration of Taxation on improvements to matters relating to administration of advance pricing agreement" (Announcement No. 64).
  • Application requirements: According to the May 2022 notice, enterprises are eligible to apply for the collaborative transfer pricing management as long as they meet the application requirements for advance ruling under Article 4 of Order No. 236 of the General Administration of Customs and the application requirements for an advance pricing arrangement under Article 4 of Announcement No. 64.
  • Application requirements for customs advance rulings: Applicants for advance rulings are to be foreign trade business operators that have actual import and export activities and are registered with Customs. 
  • Application requirements for advance pricing arrangement: APAs are generally applicable for enterprises with related-party transaction amounts of more than RMB 40 million in each of the three years preceding the tax year on which the competent tax authorities deliver to the enterprise the “Notice of taxation matters” on the authorities’ intention to negotiate and sign an APA.

Based on the above application requirements, enterprises that registered in Shenzhen engaging in the general trade import activities, have high transfer pricing compliance, and that meet the relevant provisions of Order No. 236 and Announcement No. 64 can apply for customs and tax collaborative transfer pricing management.

Application procedures

  • Application and acceptance: An enterprise is to simultaneously submit the "Application form for the collaborative management of transfer pricing of related-party imported goods" to the general operation department of the local in-charge Customs authority (subordinate customs of Shenzhen Customs) and the in-charge authority of Branch Four of the Shenzhen Tax Bureau. After receiving the application from the enterprise:
    • The relevant departments will jointly determine whether the enterprise meets the acceptance criteria within 10 days.
    • They will provide their acceptance opinions in the collaborative management application form, after which the acceptance department will deliver the application form back to the enterprise.
    • If during the evaluation the departments find that information provided by the enterprise is incomplete, the enterprise will receive a one-off notification to make corrections within five days. 
  • Evaluation and consultation: After an enterprise's application is accepted, the Shenzhen Tax Bureau and Shenzhen Customs will begin a joint evaluation within 15 days of acceptance of the application and negotiate with the enterprise on the related-party import price. The parties may jointly or independently carry out on-site inspections and/or any specific consultations after which they can reach a preliminary intent with the enterprise.
  • Signing of memorandum: If the Shenzhen Tax Bureau and Shenzhen Customs reach a consensus through negotiation, the legal representatives of the three parties or their authorized representatives will jointly sign a “Memorandum of collaborative management.” Concurrently, Shenzhen Customs will issue an advance price ruling on the enterprise, and Shenzhen Tax Bureau will sign an APA with the enterprise. 
  • Implementation of memorandum: During the covered period of the collaborative management memorandum, the enterprise will submit an annual report on the implementation to the Shenzhen Tax Bureau and Shenzhen Customs within six months after the end of each financial year. If the enterprise adjusts the price of goods according to the terms of the memorandum, the Shenzhen Tax Bureau and Shenzhen Customs will then perform corresponding procedures to confirm the adjustments according to 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 themselves, or upon the application of the enterprise, the Shenzhen Tax Bureau and Shenzhen Customs may negotiate to revise or terminate the memorandum.
  • Expiry and renewal: The memorandum of collaborative management will automatically expire after the covered period expires. Enterprises can apply for renewal within 90 days before expiration of the memorandum.

Main terms of collaborative management memorandum

The collaborative management memorandum, jointly signed by the three parties, includes 12 main areas, such as the general definition, application scope, application period, key assumptions, transfer pricing method and customs valuation method, imported goods price adjustments, annual reports, etc.

The following measures are critical to the memorandum:

  • Applicable covered period: Three calendar years. 
  • Transfer pricing method and customs valuation method: It is necessary to clarify the transfer pricing method and customs valuation method, as well as the adopted financial indicators and fair transaction value range, in the memorandum. 
  • Adjustment of the import price: The enterprise will determine that the actual financial indicators of any year are implemented according to the median value of the agreed arm’s length range. If it is lower or higher than the median value, the enterprise must adjust the price to the median value. The competent customs and tax bureau will then review the adjustments respectively.  
  • Key assumptions: The text of the memorandum refers to the relevant provisions of the advance pricing agreement with the tax bureau and makes key assumptions on the internal and external business environment and other factors that may have implications on the implementation of the collaborative management. When there is a change to the key assumptions, the enterprise is required to report in writing to the competent customs and the competent tax bureau within 30 days, and the parties may revise or terminate the memorandum through negotiation as appropriate.

KPMG observation

The collaborative transfer pricing management system introduced in Shenzhen provides a solution for Shenzhen-based enterprises that encounter difficulties in balancing the implications of related-party transactions between tax and customs authorities and that want to avoid being investigated and possibly have their related-party import transactions being adjusted by either or both of the authorities. The new system launched in Shenzhen is based on the customs’ advance ruling system and the tax authorities’ advance pricing arrangement system.

Without overstepping the limits of the existing tax and customs regulatory frameworks, the roll-out of the notice is being viewed as a novel attempt to combine the regulations of the two departments. In addition, procedures for collaborative management were laid out for the two departments to jointly review and to mutually recognize and confirm the negotiation results in advance in a tripartite memorandum signed by the enterprise, tax bureau and customs authorities.

Through the joint notice, the Shenzhen Tax Bureau and Shenzhen Customs measures spell out the specific requirements and procedures that enterprises must meet when applying for the collaborative management. Tax professionals have observed that the notice does not set an excessively high threshold for the application of collaborative transfer pricing management. A Shenzhen-based enterprise that meets the existing application requirements for a customs advance ruling and an advance pricing arrangement is eligible to apply. The clear application procedures and acceptance time limit will also make it possible for enterprises to make use of the new system more efficiently, and tax professionals expect more Shenzhen enterprises could benefit from the promotion and implementation of this system—and with the possible trial implementation and promotion of similar systems outside of Shenzhen.

Under China's current customs advance ruling system, enterprises can obtain customs’ written opinion on the reasonableness of import prices by applying for advance price rulings. However, based on past practice, customs authorities often only conducted "qualitative" review, i.e., from the aspects of the completeness of price elements and whether the related-party transactions affect the transaction price, etc. It has been uncommon for customs to issue advance ruling based on a quantitative review of the reasonableness of an enterprise’s specific import prices and profit levels. However, through the joint notice coupled with the advance ruling system, Shenzhen Customs would provide "qualitative" judgment opinions on the import price of the enterprise, and also provide specific quantitative and executable advance ruling conclusions based on the negotiation results with the tax authorities. This would be a major breakthrough in the application of the customs advance ruling system, enabling enterprises to make more use of the advance ruling system in the future to resolve any customs issues that may arise out of their related-party transactions.

For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:

Komal Dhall |

Or contact the Global Practice Leader of KPMG’s Trade & Customs practice:

Doug Zuvich |


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