In order to achieve high growth target set in 2010, many multinational companies have adopted various means of strategic financial and operational planning upon their supply chains under the global economic slowdown. Among all possible ways, transfer pricing (“TP”) is one of the key issues that all companies can not afford to overlook. In China, the issuance of Guoshuifa [2009] No.2 titled “Implementation Measures of Special Tax Adjustments (Trial)” - commonly referred to as the Circular 2 – issued in January 2009 marked a significant step-up in China’s TP enforcement regime. All stakeholders, by including the national and local tax authorities, local taxpayers, top management overseas, are anticipating supervision over cross-border related party transactions (“RPTs”) would be much more stringent than it has ever been.
How to ensure your TP documentation prepared is sufficient to justify your arm’s length observed, reasonable profitability upon your RPTs conducted? How to revisit your transfer pricing policies in recent years so as to reconcile existing business structure and your previous TP position? How to properly deal with China tax authorities’ challenges? What are the common pitfalls in facing or negotiation with local tax officials during a TP investigation? All these are popular issues that had been troubling taxpayers operating businesses in China nowadays.
PEO is pleased to have the invited eminent speakers from PricewaterhouseCoopers to share with you the practical measures in handling TP matters in China. Real-life cases under various scenarios, on top of what had been literally stated in the Circular 2, will be analyzed and explained to help you to gain a further insight at the real time China’s TP environment.

Case Study 1:

Would my TP documentation prepared be sufficient to justify my profitability?

ABC China, a contract manufacturer for its Japanese parent company “ABC Japan”, is mainly engaged in manufacturing and sales of computer components in Shenzhen. ABC China purchases most of the raw materials from ABC Japan and sells 70% of its finished goods to ABC Japan for its onward sales to overseas unrelated customers. The remaining 30% of finished goods produced by ABC China are sold directly to domestic unrelated customers.

• What shall be included in my TP documentation to comply with statutory requirements under Circular 2?
• How could the TP documentation be applied to support any inquiries posted by the local Chinese tax authorities?
• How should my internal TP policy be documented properly?
• What are the recent clarifications from Chinese tax authorities and taxpayers on China’s 1st TP documentation compliance regime?
• What kinds of documents / information shall be prepared to support ABC China’s TP policy?

Case Study 2: 

How could a single function company support its loss position?

ABC Shenzhen was set up in year 2006 and mainly engaged in manufacturing of power supply products in its first few years. Due to the decreasing sales demands of power supply products, ABC Shenzhen started to expand the business portfolio and introduced new product lines for liquid crystal display (“LCDs”), printed circuit board (“PCBs”), and other computer peripheral devices. ABC Shenzhen has suffered continuous losses since start-up. In year 2008, it was obliged to enter the first year of enjoying the 2+3 tax holiday under the China’s new income tax law.

• How can ABC Shenzhen explain to tax authorities regarding its continuous loss position?
• What would be the common views taken by the Chinese tax authorities on the loss position incurred by a single function company?
• What actions / documents should be taken / prepared by ABC Shenzhen to defend its TP position from a practical perspective?

Case Study 3:
 
How to approach / conduct explanations / negotiations on my low profit level with the local tax officers?

ABC Guangzhou was established by a US parent company via an investment holding company registered in BVI in year 2005. It was mainly engaged in contract manufacturing of lower-entry level cosmetics products. While major functions (e.g., R&D, sales and marketing) along the supply chain are performed by its US parent company, ABC Guangzhou has maintained in continuous low profit position through years 2005 to 2007. In year 2007, ABC Guangzhou established another manufacturing plant, ABC Panyu, engaging in producing container outlook packaging products. ABC Panyu has been in favorable profit position since its establishment.

• What factors shall be taken into consideration to explain the continuous low profit position of ABC Guangzhou?
• What challenges / queries might be raised by Chinese tax authorities?
• How to negotiate with Chinese tax authorities in relation to ABC Guangzhou’s low profit position?

Case Study 4: 

How to align regional coordination efforts upon group companies in setting out a TP policy and liaise with different local tax bureaus?

Group A has over 10 subsidiaries in northern, central and southern China, which are engaged in provision of divergent services (i.e., manufacturing, distribution, contract R&D and other inter-company services) for the Group.

• How should these subsidiaries coordinate in daily practices to support the implementation of the TP policies of Group A?
• What are the different focuses between national and local-level tax authorities in reviewing Group TP policies?
• How to address various national and local tax authorities’ requirements in documenting the Group’s TP policy?
• Are there any practical experiences sharing from both national and local Chinese tax authorities’ perspective?

Case Study 5:

Should I choose advance pricing arrangement (“APA”) handling as a tool to manage my on-going TP position?

ABC Shanghai is a Shanghai based company engaged in provision of contract manufacturing services for its Korean Parent Company. In year 2009, Chinese tax authorities initiated the general TP audit upon ABC Shanghai for its continuous low profit position incurred through years 2004 to 2008, and imposed the retrospective TP adjustment for years 2004 to 2008 with the target full cost mark-up (“FCMU”) ratio at 5.0%. The management of ABC Shanghai would like to plan ahead in order to polish its internal TP policy.

• What is the general procedure of the TP audit and APA? Which party will have the authority to initiate them?
• How should ABC Shanghai utilize the TP documentation as defense tools in a general tax audit?
• What type(s) of inter-company transactions are recently focused by Chinese tax authorities?
• What are the key actions recently taken by Chinese tax authorities in TP audit cases?
• How to plan / support your TP policy through APA?

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