China: Increased customs challenges with intercompany license payments

Published on October 28, 2016

Intercompany license fee charge has always been a hot transfer pricing topic in China in recent years. However, in addition to the potential transfer pricing considerations, its impact on the customs perspective should also be taken into consideration.
  
According to the Chinese Customs Regulations, license fees paid related to the imported goods should be included into the dutiable price for customs duty and import VAT calculation. In addition, the General Administration of Customs in China has issued the Circular [2016] No. 20 on March 24, 2016, announcing the use of the updated import and export declaration forms, starting from March 30, 2016. The new form has added three new information disclosure requirements asking the taxpayer to internally assess and confirm whether he (i.e. the importer) has any special relationships with the overseas seller and whether the importer will pay any license fees related to the imported goods to the seller. Any false declaration in the form if identified by the customs authority later will lead to additional penalties (including customs rating downgrade).
   
After the issuance of the Circular, it is also noticed that local customs authorities were strengthening their investigations on this regard and a lot of enterprises have received challenges regarding on whether their intercompany license fee charge should be included into the customs duty calculation.  
 
The license fee payment in China will also be subject to a withholding corporate income tax rate of 10 percent and VAT rate of 6 percent, which makes the model tax inefficient under certain circumstances. It is recommended for taxpayers who import from related parties and/or pay intercompany license fees, to internally check whether there are any risks on double taxation under the current business model. For situations where such risks do exist, the group may need to consider for a transfer pricing structure change while for situations where it is believed the import price is arm’s-length and the license fee payments are not related to the imported goods, the taxpayer needs to prepare the relevant documents for supporting its confirmation so as to facilitate a prompt response to the customs authority once being challenged.