In 2018, the World Customs Organization (WCO) published a new edition of the Guide to Customs and Transfer Pricing. The updated guide introduced a pending issue for international guidance in relation to Customs requirements and procedures for transfer pricing adjustment. This relies on national Customs Administrations to determine the corresponding Customs value or import price adjustment policy.

Where a Customs authority decides that a retrospective adjustment to the Customs value or import price is appropriate, it is necessary to determine the mechanism and calculation method to implement the adjustment in a compliant and effective way, since Customs' focus is on a transaction basis whereas transfer pricing is at entity level.

Although China Customs keep silent on the applicable regulations in relation to Customs requirements and procedures for transfer pricing adjustment, real case precedents have been established to address practical administration by China Customs. This alert aims to help you understand the basic China Customs retrospective import price adjustment mechanism.


Set out below is a brief summary of the key highlights in relation to the retrospective import price adjustment:

  1. Applicable circumstances

  2. Companies which import goods under related party transactions may utilize retrospective import price adjustment mechanism to manage the following compliance requirements:

    • Inconsistency with global transfer pricing policy due to excess profits for a Chinese subsidiary– gross margin (GM) or operating margin (OM) higher than the transfer pricing benchmark range
    • Overseas seller or headquarters' tax compliance position
    • Import pricing to China or prospective import price adjustment has not been changed or implemented timely during the fiscal year
  3. Adjustment method in practice

  4. A downward adjustment on profits for a Chinese subsidiary can be achieved through the following methods:

    • Adjustment on cost of goods sold (COGS) – based on entity level OM; or
    • Adjustment on cost of goods sold – based on entity level GM; or
    • Adjustment on cost of goods sold and inventory – based on entity level GM; or
    • Adjustment on specific import goods – product level.

OM adjustment on Cost of Goods Sold is most commonly applied but other methods can be reviewed on a case-by-case basis depending on the company's background and commercial substance.

Our observations

Retrospective import price adjustment mechanism especially for trading company downward adjustment on profits has been established by China Customs in practice.

As a basic requirement for Customs to consider an adjustment, a transfer pricing policy will be requested which can demonstrate how the transfer pricing (import price) is formulated (including the retrospective true-up mechanism). Application of the weighted-average customs duty rate is also negotiable case by case to support a lump-sum adjustment at the end of the year. No late payment fee or penalty will be imposed for the retrospective adjustment in most cases in terms of voluntary disclosure to Customs.

However, due to lack of published regulatory guidance, it is not uncommon for companies (even local Customs) to have limited knowledge regarding the implementation procedures and requirements. In this regard, not all Customs departments can fully understand and implement the procedures in practice. It is mostly recommended that companies can negotiate with  Customs specialized valuation departments and build up long-term adjustment mechanism.

It is important for the companies to study the feasibility of the year-end retrospective import price adjustment in advance, which covers:
  • business model and importer's function throughout the value chain
  • adjustment calculation method and financial impact
  • industry specific consideration or special requirement
  • potential approach and relevant Customs acceptability

Regardless of the typical cases shared in this alert, based on our experience, some special year-end adjustment cases (e.g., manufacturing company adjustment or even under bonded manufacturing model, or entity group adjustment as a whole, or adjustment in specific industry) require solid strategic planning, thorough preparation and sufficient communication with Customs to support the implementation and companies normally will consider involving an experienced advisor to support them throughout the process.

What can our Customs and trade team in China help you with?

Through extensive successful case experience, Dentons Customs and Trade team in China deliver solutions from strategies to execution. This includes:

  1. Providing advice on pricing policy formulation and review, and sharing real case experience to discuss the practice and align with all the internal stakeholders of companies;  
  2. Performing a sound and thorough assessment in terms of the feasibility of retrospective import price adjustment for specific cases;
  3. Preparing solid and comprehensive explanation and review supporting submissions in order to facilitate the whole process;
  4. Strategically analyze and suggest the approach of voluntary disclosure to China Customs;
  5. Assisting companies to meet and explain to Customs to reach a mutual alignment on the adjustment and future review mechanism;
  6. Keeping connections with local Customs to facilitate the operation and obtain Customs import declaration forms and duty and import VAT memos.

Our Customs and Trade practice in China

The Customs and trade regulatory environment in China is complex and has been continually evolving. Our Customs and trade team in China consists of ex-Customs senior officials, seasoned professional consultants and industry experts who have a profound knowledge of Customs regulations and rich experience in handling all kinds of Customs and trade-related issues in China. We can help our clients create value through structuring and implementing creative Customs and trade strategies and maintain a high level of Customs and trade compliance and manage risks by providing a robust defense during Customs inquiries, audits and investigations.

About Dentons

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.