Special Tax Company Adjustment Implementation Measures & Transfer Pricing Documentation Compliance in China

Transcription

1 Company LOGO Special Tax Company Adjustment name Implementation Measures & Transfer Pricing Documentation Compliance in China Ning Song Senior Partner Prince Zi Wang Tax Manager China Taxation Agency Co., Ltd

2 Agenda I. Special Tax Adjustment Implementation Measures ( the Final Measures ) A. Regulation development B. RPT reporting C. Contemporaneous Documentation D. TP Investigations & Adjustments II. TP Documentation Compliance A. General matters B. Documentation approaches C. TP master file 2

3 Company Company name LOGO Special Tax Adjustment Implementation Measures ( the Final Measures )

4 A. Regulation development FEIT Income Tax Law EIT Income Tax Law Guoshuifa [1998] No.59 Guoshuifa [2004] No.143 Guoshuifa [2004] No.118 the Draft Measures in March, 2008 Unified EIT Income Tax Law ( New EIT Law ) Implementation Measures for special tax adjustments ( the Final Measures ) 4

5 A. Regulation development (Cont d) New EIT Law Chapter 6 the Measures Our Observations SAT Achievements To ensure high standard and consistency in TP enforcement and administration; To correct certain China s old TP regime with past experiences in investigation cases. 13 chapters 118 provisions 5

6 A. Regulation development (Cont d) Chapter 1: General Provisions; Chapter 2: Reporting of Related Party Transactions ( RPT ); Chapter 3: Administration of Contemporaneous Documentation; Chapter 4: Transfer Pricing Methods ( TPM ); Chapter 5: TP Investigations & Adjustments; Chapter 6: Administration of Advance Pricing Arrangements ( APA ); Chapter 7: Administration of Cost Sharing Agreements ( CSA ); Chapter 8: Administration of Controlled Foreign Corporations ( CFC ); Chapter 9: Administration of Thin Capitalization; Chapter 11: Corresponding Adjustments & International Consultation; Chapter 12: Legal Obligations; Chapter 13: Supplementary Provisions. 6 the Final Measures

7 B. RPT reporting FIE RPT reporting on Form A-13-A/B Form 1 - disclosure of related-party relationships Form 2 - summary of related-party transactions Form 3 - sales and purchases Form 4 - services Form 5 - transfer of intangible assets Form 6 - transfer of fixed assets Form 7 - financing Form 8 - outbound investment Form 9 - outbound payments 7 Under New EIT Law All Enterprises the Final Measures RPT Forms [2008]114 Article 43 Article 11

8 B. RPT reporting (Cont d) the Draft Measures the Final Measures Updates Disclosure on asset transfers is now separated into the disclosure of inter-company use and sale of intangible assets and fixed asset transfers. Thin capitalization related disclosure is now combined with financing transactions disclosure in one form. Controlled foreign corporation related disclosure now is in Outbound Investment. These changes have reduced the number of forms from 10 to 9. 8

9 B. RPT reporting (Cont d) RPT reporting obligation for non-resident enterprises that have establishments in China and file and pay corporate income tax on an actual basis; RPT reporting indication of in place contemporaneous TP Documentation; Highlights Absence of guidelines on year-end compensating adjustment. the SAT has reservations on it. Such year-end adjustments might be viewed as TP manipulation. Thus, enterprises should evaluate their TP policies and practices throughout the whole versus year-end only; 9

10 C. Contemporaneous Documentation a. Who? Article 9 Article 15 Article 43 b. When? c. What? Article 16 Article 20 Article 116 Article 14 d. How? II. TP Documentation Compliance 10

11 a. Who? RP identification 8 criterion Highlights Enterprises should carefully review all types of relationships to do the disclosure compliance Article 9 Ownership Effective Control Indirect share ownership; Major financers; Common management; 11 Updates Article 43 the ownership threshold is revised back to 25% from the 20% in the Draft Measures. Significant suppliers & customers.

12 a. Who? (Cont d) Exemption There are 3 kinds of enterprises that are exempt : Entities below a certain volume- threshold of RPT; Entities with RPT covered by an APA; 12 Article 15 Highlights Article 43 Entities that do not have significant foreign ownership and do not have any cross-border RPT. Elimination of the simplified Documentation obligation Updates Annual RPT from 20 million to 200 million or 40 million (financing) Toll manufacturing based on import/export customs declaration prices Foreign ownership lower than 50% as a supplementary regulation for domestic RPT exemption

13 b. When? May 31 and kept for 10 years; Article 16 Article 20 Article 116 Highlights 20 days upon request and 20 days extension for uncontrollable force. For FY2008, December 31 Submission and extension dates extended from 15 to Updates Observations Although the deadline is prolonged to be Dec 31, 2009 RPT reporting deadline is May 31, 2009 with an indication of in-place TP Documentation; TP Documentation is the basis for completing RPT reporting (data consistence); TP Documentation can be hand over to tax bureau during tax audit; TP adjustment needs to be done, when necessary, as early as possible; TP Documentation is time consuming itself, especially on a group consistence manner. Article 43

14 c. What? 1. Organizational Structure 2. Overview of Business Operations 3. Information Regarding Related Party Transactions 4. Comparability Analysis Article Selection and Application of Transfer Pricing Methodologies In 1.(3) detailed the related party information disclosure Highlights Updates In 2.(5) financial report of tested party and related party are changed to be group consolidated financial repot In 3.(7) explanations supporting the financial allocation rationale Observations The Final Measures provide no preference or hierarchy for selecting TPM, flexibility and challenge of proof co-exist Article 43 14

15 D. TP Investigations & Adjustments Article Article 43 Highlights 7 types of enterprises that are key targets for TP audit : Enterprises with a large amount of RPT or have multiple types of RPT; Enterprises with long-term loss, marginal profit or fluctuating profit; Enterprises with profit level lower than the industry level; Enterprises with profit levels obviously do not match with the functions performed and the risks assumed Enterprises which have transactions with associated parties registered in a tax haven Enterprises which fail to make a declaration of their related party transactions or prepare contemporaneous documentation based on regulations; and Other enterprises which obviously disobey the arm's length principle. Deleted Enterprises with profit level lower than its group level Updates

16 D. TP Investigations & Adjustments (Cont d) Article 30 Highlights Article 43 TP audit immunity RPT between domestic related parties with the same actual tax rate, as long as the RPT does not directly or indirectly result in the reduction of tax revenue as a whole. Article 31 Article 37 Article 41 Article 45 An enterprise may provide contemporaneous documents to tax authorities during desktop verification and analysis. The tax authorities may use non-public information for the analysis and evaluation; Official clarification of the use of Inter-quartile Range Updates The enterprise should provide contemporaneous documents for a supervision year before June 20 of the following year during the followup supervision period. 16

17 D. TP Investigations & Adjustments (Cont d) Article 31 TP Documentation Transfer Pricing Audit Procedures Select target Article 43 Highlights Enterprises can provide TP Documentation during desk-top review, which may reduce the chance of further TP audit, given that the TP Documentation in place is appropriate prepared. Investigation Wrap up Wrap up Follow up Follow up Observations The Final Measures are silent on any limits to the duration of the investigation. 17

18 D. TP Investigations & Adjustments (Cont d) Select Target Investigation Desk Audit Select target Field Investigation Report for Approval Eliminated Non-targets Wrap up Docketing a Case Follow up Notice Issuance Selected Targets 18

19 D. TP Investigations & Adjustments (Cont d) Select Target Investigation Wrap up Desk Audit Select target Field Investigation Information Request Outbound Investigation Investigated Issues And Preliminary Adjustment Proposals Follow up Preliminary Adjustment Proof and Negotiation 19

20 D. TP Investigations & Adjustments (Cont d) Select Target Investigation Adjustment proposal Select target Report for Approval Formal Notice Wrap up Tax Adjustment and Settlement Follow up Tax Under Payment Collection 20

21 D. TP Investigations & Adjustments (Cont d) Select Target Investigation Wrap up Follow up Article 45 TP issues identified during the follow-up period do not necessarily result in an audit the tax authorities shall first communicate with the enterprise in a timely manner and may request to make a voluntary selfadjustment Select target Administrative Reconsideration Litigation Highlights Bilateral Negotiation Application Accepted or not? 21

22 Company Company name LOGO Transfer Pricing Contemporaneous Documentation Compliance

23 II.TP Documentation Compliance A. General matters Legislation angle, Who? When? What? Initiatively, Why? TP audit immunity Desk-top review turn-back Penalty component How? Time limit 26 items coverage Article 107 Article 14 Linkage with RPT reporting compliance Case by case work load / Compliance cost 23

24 II.TP Documentation Compliance B. Documentation approaches Factual Factual Review Review Industry Industry Analysis Analysis & Function Function and and Risk Risk Analysis Analysis Financial Financial Analysis Analysis TPM TPM Selection Selection Comparable Comparable Economic Set Set Selection Economic Selection Analysis Analysis TP TP Documentation Documentation Interview Interview to to collect collect functional functional information information & potential potential comparable comparable transactions transactions Identify Identify RPT RPT and and tested tested party, party, analyze analyze their their F&R F&R Segment Segment and and analyze analyze financials financials Select Select best best TPM TPM Set Set search search criteria criteria and and select select comparable comparable set set Select Select PLI PLI and and conduct conduct economic economic analysis analysis Draft Draft report report and and final final report report 24

25 II.TP Documentation Compliance B. Documentation approaches (Cont d) Factual Factual Review Review Article 14 IDR Questionnaire 高 高 Industry Industry Analysis Analysis & Function Function and and Risk Risk Analysis Analysis 363 F&R Profitability 低 低 25

26 II.TP Documentation Compliance Internal communication Tax / Finance Dept. The Final Measures Effective Communication Operating Dept. Interview Interview & F&R F&R Analysis Analysis R&D Manufacturing Sales & Marketing After sale services Management & Administration 26

27 II.TP Documentation Compliance B. Documentation approaches (Cont d) Financial Financial Analysis Analysis Review incl. number matching-up with RPT report Segmentation Special factor analysis & adjustment Capital adjustment (SAT approval) TPM Target PLI TPM TPM Selection Selection CUP RP CP Price Gross Profit Unit Price Unit Price GM GCP TNMM PS 27 Operating Profit OM NCP Berry Ratio ROA/ROE

28 II.TP Documentation Compliance B. Documentation approaches (Cont d) Comparable Comparable Set Set Selection Selection 28

29 II.TP Documentation Compliance B. Documentation approaches (Cont d) Economic Economic Analysis Analysis Upper Quartile -3% Median 7% 2% 1% Lower Quartile 11% 9% 9% 18% 14% 13% C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12 C13-8% -12% -15% 29

30 II.TP Documentation Compliance B. Documentation approaches (Cont d) TP TP Documentation Documentation Stamped with official chop and signed or sealed by legal representatives In Chinese Highlights Upon request, or obliged to provide under investigation, sufficient and professional explanation and discussion with the tax bureau is a strong plus for the report. 30

31 II.TP Documentation Compliance C. TP master file Taxpayer with TP Documentation master file Language Localization TPM Localization PLI Localization Comparable Set Localization Taxpayer without but would be effective to have TP Documentation master file Economic analysis update only 31

32 中税 CTAC Incorporated in January, 1997, China Taxation Agency Co., Ltd. is one of the pioneer and leading tax advisory firms in China. Formerly affiliated to State Administration of Taxation, CTAC was transformed into an independent partnership in Headquartered in Beijing and Hong Kong, CTAC has branches covering major cities across China, providing integrated professional tax services to national and international large enterprises

33 Ning Song Senior Partner CTAC speaker Tel: Fax: Mobile: Mr. Song is a Senior Partner of China Tax Agency Co., Ltd. He has served a number of our key domestic and MNC clients in China-US, China-JP BAPA negotiation, transfer pricing audit defense, and transfer pricing planning, documentation, benchmarking, etc. Before Join CTAC, Mr. Song was TP Senior Manager of one of Big Four and led its North China TP team. Mr. Song also has more than fourteen years of experience with China tax authorities, including eight years in the transfer pricing area. He had also played a key role in many national joint transfer pricing audits and bilateral Advance Pricing Agreement negotiations. In addition, he had actively participated in drafting new tax laws and rules, including China s APA rules, TP Regulations, and the new EIT tax law Chapter VI. Mr. Song is CTA and has received Economics 33 Master degree and LL.M. in Taxation. 33

34 CTAC speaker Prince Wang Tax manager Tel: Fax: Mobile: Ms. Wang is tax manager of CTAC, she has wide experience in various types of TP practice, provided all kinds of TP services to multinational firms from different industries. Before joining CTAC, Prince had 3 years working experience in a Big 4 s Transfer Pricing Team, taking the role of client service senior level staff, especially for giant multinational clients nationwide projects

35 Q&A Thanks! 35