The Missing USD 102,000: Related-Party Purchases, Assists and a Year-End True-Up
Importer A buys 12,000 control units from its wholly owned overseas parent at USD 40 each, invoice total USD 480,000. The parent sells the same model to unrelated regional buyers at USD 46. A's declaration included the invoice price, freight of USD 9,000 and insurance of USD 1,200, nothing else. An internal review then found: (i) A supplied the parent free of charge with a test fixture used only for this model, valued at USD 60,000, which the parent will consume on the whole 12,000-unit order; (ii) A pays a third-party licensor 4% of net resale for a patent that is a condition of sale of the units, USD 32,000 attributable to this shipment; (iii) A pays a buying agent 2% of invoice value to find and vet suppliers; (iv) A paid a Chinese contractor USD 5,000 to install the units after import, separately invoiced. At year end the parent and A sign a transfer-pricing true-up adding USD 35,000 to the year's purchase price. Rate: USD 1 = CNY 7.10; MFN duty 8%; VAT 13%; no consumption tax.
1. For each of the six elements in the file, decide whether it enters the customs value, and state the legal reason in one line each, not a conclusion only.
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1. Invoice price - enters. It is the price actually paid or payable for the imported goods, the starting point of transaction value.
2. Freight USD 9,000 and insurance USD 1,200 - enter. Customs value is built up to the place of importation, so international transport and the cost of insurance to that point are additions. If insurance were not ascertainable, a prescribed rate would be applied instead; here it is invoiced, so use the actual figure.
3. Test fixture USD 60,000 - enters. This is an assist: goods supplied directly or indirectly by the buyer, free of charge, for use in the production of the imported goods. Because it is consumed on the whole 12,000-unit order, the whole USD 60,000 is apportioned to this shipment. Had the fixture been used across several models, only the apportioned share would enter.
4. Royalty USD 32,000 - enters. Both limbs of the royalty test are met: the payment is related to the imported goods (a patent embodied in them) and it is a condition of sale of the units. Had the licence been for a production process used abroad and payable regardless of the import, the answer would reverse.
5. Buying commission 2% - does not enter. A buying agent acts on the buyer's behalf; buying commissions are excluded from customs value. Had the same 2% been paid to the seller's agent for selling, it would enter as an indirect payment.
6. Post-import installation USD 5,000 - does not enter. It is a service performed in the importing country, separately invoiced, arising after importation. It would only be dragged in if it were a condition of sale with the price not apportioned.
2. Compute the customs value, duty and import VAT. Present the arithmetic so a reviewer can verify each line.
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Build-up of the customs value (USD)
| Line | Amount |
|---|---|
| Invoice price (12,000 × 40) | 480,000 |
| Assist - test fixture apportioned | 60,000 |
| Royalty (condition of sale, related to the goods) | 32,000 |
| International freight | 9,000 |
| Insurance | 1,200 |
| Customs value | 582,200 |
Excluded and therefore not added: buying commission (480,000 × 2% = 9,600) and post-import installation (5,000).
Conversion: 582,200 × 7.10 = CNY 4,133,620
Duty at 8%: 4,133,620 × 0.08 = CNY 330,689.60
VAT base (duty-paid value): 4,133,620 + 330,689.60 = CNY 4,464,309.60
VAT at 13%: 4,464,309.60 × 0.13 = CNY 580,360.25
Total import taxes: CNY 911,049.85
Sanity checks a reviewer should run: (a) the assist is not double counted against the invoice price - the parent received it free, so it is genuinely additional; (b) the royalty is the shipment-attributable figure, not the full annual licence fee; (c) VAT is computed on duty-paid value, not on customs value alone; (d) the exchange rate applied is the prescribed rate for the declaration date, not a contract rate. A common exam slip is adding the 2% agent fee because it 'feels like' a cost of the goods - it is not a dutiable addition when the agent acts for the buyer.
3. Customs questions whether the USD 40 price is reliable because the parties are related. How should that be resolved, and how is the year-end true-up of USD 35,000 handled?
Read the worked answer
Relationship does not automatically disqualify the price. The test is whether the relationship influenced the price. Customs examines the circumstances of sale - how the price was set, whether it reflects normal pricing practice in the trade - and accepts transaction value if the price closely approximates a test value: identical or similar goods sold to unrelated buyers in the same country and time, deductive value, or computed value.
Applying it here. The parent sells the same model to unrelated regional buyers at USD 46 against USD 40 (about 13% lower), and the importer declared nothing beyond freight and insurance. On the declared file the price does not closely approximate the test value, so customs is entitled to probe. The importer's best response is a transfer-pricing file: functional analysis, the group's pricing policy, margins earned by unrelated resellers, and evidence that the difference reflects legitimate functions or volumes. If it cannot be shown, transaction value falls away and valuation moves to the sequential fallbacks - identical goods, similar goods, deductive value, computed value, and only then a flexible fallback. The higher duty exposure is materially larger than the CNY 330k computed above.
The true-up. An adjustment to the price actually paid or payable after importation is a dutiable event. The USD 35,000 must be declared - within the period the national rules allow after the adjustment is known - with duty and VAT paid on it and interest running. It does not merely affect next year's entries.
Practical sequencing. Correct the current entries for the assist, royalty and true-up first; then negotiate the pricing issue with a fortified transfer-pricing file. Trying to argue the price is arm's length before the undisclosed additions are remedied undermines the company's credibility on both points.