China's collaborative TP management enhances tax certainty in Shenzhen.

As a result of their joint circular, the Shenzhen customs district and State Taxation Administration's TP project might grow throughout China.

As firms in Shenzhen gain confidence, transfer pricing (TP) coordination between the local customs authority and State Taxation Administration (STA) is expected to become widespread in China in May, say tax directors.

"In a limited sense, this will be welcomed by many businesses who are experiencing difficulties. It is a fantastic chance for those making TP modifications to examine how the two authorities can coordinate and assist firms in addressing the concerns, according to the tax director of a Chinese toy manufacturer.

The Shenzhen customs authority and Circular No. 62 of the STA entered into force on May 18, 2022. It relates to the TP treatment of items imported from connected parties overseas.

This first-ever partnership will have an impact on Shenzhen-based businesses, since many have had TP issues with customs authorities, particularly export and import businesses.

According to the tax director, however, foreign exchange control regulations have frequently proven to be onerous for businesses that shift their TP.

Customs officials must assist businesses in managing their TP legal problems. Prior to this intragovernmental TP management initiative, taxpayers and authorities had no chance to debate and assess TP modifications.

The regional tax and customs administrations functioned autonomously and reviewed RPTs using a variety of distinct procedures and for unique objectives.

"In accordance with foreign exchange control regulations, remittances entering and leaving China must be backed by paperwork if they involve products," states the tax director. It is a prevalent problem.

Abridged APAs

The partnership also entails that customs officials would jointly analyse advance pricing agreements (APAs) and assist businesses with STA-related TP changes.

The price of products will be decided via an application process in which the customs authority will issue a price ruling in advance. The tax administration will then sign an APA that will enhance tax certainty for Shenzhen-based businesses.

Mimi Wang, partner in TP at the Shanghai-based consultancy company KPMG, believes the plan for government collaboration might be a comfort for taxpayers seeking certainty around tax bills and compliance.

"Historically, taxpayers have frequently mentioned lengthy talks on scheduling as barriers to finishing APAs with Chinese tax officials," adds Wang.

"Multinational corporations would be driven in different directions, with customs focused on the gross margin and tax authorities on the net margin," she explains.

Due to the lack of cooperation between the tax authorities and customs, firms in China might suffer double taxation as a result of TP adjustment, according to Jason Wen, head of the tax controversy practise at Baker McKenzie FenXun joint operation in Beijing.

"It remains to be seen how Shenzhen STA and Customs will execute bulletin 62, but we feel it is a new effort by the local authorities to solve the double taxation issue and bring more confidence to MNEs' transfer pricing and customs value management in China," he adds.

According to Wang, the collaboration on TP connected to commodities might therefore give "a way for global corporations to simultaneously control customs and tax concerns."

Following the 2021 bulletin (No.24) that streamlined the procedure for unilateral APAs, this will be an additional benefit for firms.

According to Wen, multinational corporations want to use the policy to proactively build a model and system to deliver certainty to the tax authorities, the customs, and, most significantly, themselves.

According to Choon Beng Teoh, TP expert at consultancy company KPMG in Shanghai, taxpayers were able to use the new administrative tools and manage risks through the APA applications or the joint collaboration regime as a result of the changes.

"The streamlined unilateral APA procedure enables highly compliant taxpayers to secure a unilateral APA agreement within 9 to 12 months of the application's acceptance," explains Toeh.

"Meanwhile, the joint partnership system allows taxpayers to receive clarity on their tax/TP and customs for a specific future term," he says. "Given the conflicting interest and emphasis of the two agencies, this helps resolve a great deal of uncertainty for taxpayers in China."

Additionally, the director of taxes views the combined efforts of both agencies as a welcome opportunity for taxpayers.

However, there is also considerable hesitation among businesses to invest further resources in this initiative due to the possible coordination issues between the taxpayer and the government.

"It demonstrates the complexity of the paperwork and plot," says the director of taxes.

A greater scope

Wang asserts that the agreement demonstrates the Chinese government's long-term commitment to enhancing the taxpayer experience.

While it is now only available in Shenzhen, other provinces will certainly implement similar intragovernmental tax initiatives.

According to Wen, the engagement demonstrates a clear trend toward greater alignment and coordination between tax authorities and customs in China in order to address transfer pricing and customs valuation difficulties.

Wen predicts that if bulletin 62 is successful in Shenzhen, other cities would likely create similar policies.

In the coming months, the enhanced tax certainty under the joint programme might get substantial attention across the nation as many firms who are still struggling with TP adjustments examine the advantages of this circular.

By fLEXI tEAM