With China’s implementation of a new corporate tax law and administrative regulations on Jan. 1, 2008, Chinese tax authorities (the State Administration of Taxation) have been developing agency regulations and rules that will increase the scrutiny applied to transfer pricing between related parties in China. This development presents an ideal opportunity for multinational companies operating in China to coordinate their customs valuation and tax transfer pricing policies to reduce their tariff and tax exposure and liability.
China Transfer Pricing Rules
Along with the inter-company pricing rules for tax administration that China issued on Oct. 12, 2004, the new regulations and rules will:
(1) highlight the criteria for transfer pricing audits;
(2) effectively demand detailed supporting transfer pricing documentation before submission of a tax return;
(3) increase the scrutiny of related party transactions for tax purposes; and
(4) encourage the use of advance pricing agreements.
Coordination with Customs Valuation Rules
With these new tools, the SAT has begun to increase its scrutiny of related party transactions. At the same time, with customs revenue currently representing approximately one-fourth of total government revenue, China Customs is increasingly looking at the valuations relied upon in related party transactions for customs declaration purposes. As the objective of China Customs from a pricing perspective is often contrary to that of the SAT (since lower import values generally lead to higher internal taxes whereas higher import values usually lead to increased tariff revenue), changes in Chinese tax laws only promise to increase the complexity of conducting business in China. Moreover, while the SAT is more focused on the process, methods and comparability analysis relied upon to support the “arm’s length” nature of a company’s transfer pricing policies, China Customs is more focused on individual transactions and the circumstances surrounding the individual sale into China. The consequences these different approaches can have on a company’s exposure to pricing policy challenges are often inadvertently shielded until they come to light during an SAT tax audit and/or China Customs audit or review.
Ironically, one example of the potential impact these policies could have arises out of the expansion of trading rights resulting from China’s accession to the WTO in 2001. Since that time, more China-based operations of multinational companies have become “buyers” of commodities into China for consumption or resale and “importers of record” for customs transactions. These related party transactions in and of themselves are now more likely to trigger customs valuation scrutiny, as the values declared for related party transactions are often lower than the ones declared for independent transactions due to factors such as commercial level, quantity, costs and other distinctions. Without advance planning and consultation with China’s customs and tax authorities, these differences could be lost on the Chinese government, thereby leading to increased costs and oversight of such transactions.
Similarly, most companies operating in China focus solely on the valuation of tangible goods for customs appraisement purposes while devoting substantial attention to both tangible and intangible goods (royalties, intellectual property rights, etc.) in determining their tax liability. This dichotomy can have ramifications, particularly as China Customs officials focus on the potential dutiability of intangible property and property rights.
Given these changes, it is critical for multinational companies to act now to review their tax and customs positions to ensure that they are taking full advantage of the opportunities presented by operating in the Chinese market while also protecting their interests against unwanted reviews and challenges of their transfer pricing policies. For additional information concerning these developments and how Sandler, Travis & Rosenberg, P.A., can support companies in this area, please contact Zhaokang Jiang in our Beijing office at +86 (10) 65059900 or Chuck Crowley in the United States at (212) 883-1300 (ccrowley@strtrade.com).
Sandler, Travis & Rosenberg, P.A., is a customs and international trade law firm concentrating in assisting clients with the global movement of goods, ideas and personnel and the setting of global trade policy. Our affiliated consulting company, Sandler & Travis Trade Advisory Services Inc., is a leading provider of trade-related management and consulting services to government and industry. For more information about ST&R and STTAS, please visit our Web site.
World Trade/Interactive
