Special Tax Adjustment LOGO Implementation Measures · Transfer Pricing Audit Procedures Investigation TP Documentation Highlights Enterprises can provide TP Documentation during

Company nameCompany

LOGO

Ning SongNing SongSenior PartnerSenior PartnerPrince Zi WangPrince Zi WangTax ManagerTax ManagerChina Taxation Agency Co., LtdChina Taxation Agency Co., Ltd

Special Tax Adjustment Implementation Measures

&Transfer Pricing

Documentation Compliance in China

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中税税务代理

Agenda

I. Special Tax Adjustment Implementation Measures (“the Final Measures”)

A. Regulation developmentB. RPT reportingC. Contemporaneous DocumentationD. TP Investigations & Adjustments

II. TP Documentation ComplianceA. General mattersB. Documentation approachesC. TP master file

China Taxation Agency Co., LtdChina Taxation Agency Co., Ltd

Company nameCompany

LOGO

Special Tax Adjustment Implementation

Measures(“the Final Measures”)

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I. The Final Measures

A. Regulation development


Guoshuifa [1998] No.59 Guoshuifa [2004] No.143 Guoshuifa [2004] No.118

FEIT Income Tax LawEIT Income Tax Law

Unified EIT Income Tax Law

(“New EIT Law”)

Implementation Measures for

special tax adjustments(“the Final Measures”)

the Draft Measures in March, 2008

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A. Regulation development (Cont’d)


New EIT Law

the Measures

Chapter 6Chapter 6

13 chapters 13 chapters

118 provisions118 provisions

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.

Our Observations –SAT Achievements


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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.


the Final Measures

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B. RPT reporting


► 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

FIE RPT reporting on Form A-13-A/B

Under New EIT LawAll Enterprises


the Final Measures

Article 43

Article 11

RPT Forms [2008]114

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B. RPT reporting (Cont’d)


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.


the Final Measuresthe Draft Measures

Updates

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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;

► 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;


Highlights

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C. Contemporaneous Documentation

a. Who?

b. When?

c. What?

d. How?

Article 43

China Taxation Agency Co., LtdChina Taxation Agency Co., LtdI. The Final Measures

Article 9

Article 16 Article 116

Article 14

II. TP Documentation Compliance

Article 15

Article 20

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a. Who?RP identification


8 criterion


Article 43

Ownership

Effective Control

Updates

the ownership threshold is revised back to 25% from the 20% in the Draft Measures.

Indirect share ownership;Major financers;Common management;Significant suppliers & customers.Highlights

Enterprises should carefully review all

types of relationships to do the disclosure

compliance

Article 9

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a. Who? (Cont’d)Exemption Article 43


There are 3 kinds of enterprises that are exempt :

► Entities below a certain volume- threshold of RPT;

► Entities with RPT covered by an APA;

► Entities that do not have significant foreign ownership and do not have any cross-border RPT.

Highlights

► Elimination of the simplified Documentation obligation

► 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

Updates

Article 15

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b. When?


Article 43►May 31 and kept for 10 years;► 20 days upon request and 20 days extension for uncontrollable force.

Highlights

► For FY2008, December 31► Submission and extension dates extended from 15 to 20

Updates

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.

Observations

Article 16 Article 116Article 20

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c. What?


Article 43► 1. Organizational Structure► 2. Overview of Business Operations ► 3. Information Regarding Related Party Transactions ► 4. Comparability Analysis ► 5. Selection and Application of Transfer Pricing Methodologies

Highlights

► In 1.(3) detailed the related party information disclosure

► 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

Updates

Article 14

The Final Measures provide no preference or hierarchy for selecting TPM, flexibility and challenge of proof co-exist

Observations

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D. TP Investigations & Adjustments


Article 43Article 297 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.

Highlights

Deleted “Enterprises with profit level lower than its group level”

Updates

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D. TP Investigations & Adjustments (Cont’d) 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. ”

Highlights

► 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”

► The enterprise should provide contemporaneous documents for a supervision year before June 20 of the following year during the follow-up supervision period.

Updates

Article 30

Article 37

Article 41

Article 45

Article 31

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D. TP Investigations & Adjustments (Cont’d)

Article 43


Wrap upWrap up

Follow upFollow up

Select target

Transfer Pricing Audit Procedures

Investigation

TP Documentation

HighlightsEnterprises 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.

Article 31

ObservationsThe Final

Measures are silent on any limits to the

duration of the investigation.

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Select target

Wrap up

Follow up

SelectTarget

Investigation

Desk Audit

Notice Issuance

Eliminated Non-targets

SelectedTargets

Field Investigation

Report for Approval

Docketing a Case

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Select target


Wrap up

Follow up

SelectTarget

Investigation

Desk Audit

Preliminary Adjustment

Field Investigation

Information Request

Outbound Investigation

Proof and Negotiation

Investigated Issues And

Preliminary Adjustment Proposals

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Select target

Wrap up

Follow up

SelectTarget

Investigation

Adjustment proposal

Report for Approval

Formal Notice

Tax Adjustment and Settlement

Tax Under Payment

Collection

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Select target


Wrap up

Follow up

SelectTarget

Investigation

Administrative Reconsideration

Litigation

Bilateral Negotiation

ApplicationAccepted or not?

HighlightsTP 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 self-adjustment

Article 45

Company nameCompany

LOGO

Transfer Pricing Contemporaneous

Documentation Compliance

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A. General matters


II.TP Documentation Compliance

Legislation angle, Who? When? What?

Initiatively, Why?TP audit immunityDesk-top review turn-backPenalty component

How?Time limit26 items coverageLinkage with RPT reporting complianceCase by case work load / Compliance cost

Article 107

Article 14

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B. Documentation approaches



Factual Review

Factual Review

Industry Analysis & Function and Risk Analysis


Financial Analysis

Financial Analysis TPM

SelectionTPM Selection

ComparableSet Selection


EconomicAnalysis

EconomicAnalysis

TP Documen-tation

TP Documen-tation

Interview to collect functional information & potential comparable transactions

Interview to collect functional information & potential comparable transactions

Identify RPT and tested party, analyze their F&R

Identify RPT and tested party, analyze their F&R

Segment and analyze financials

Segment and analyze financials

Select best TPM

Select best TPM

Set search criteria and select comparable set

Set search criteria and select comparable set

Select PLI and conduct economic analysis

Select PLI and conduct economic analysis

Draft report and final report

Draft report and final report

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B. Documentation approaches (Cont’d)



Factual Review

Factual Review

Article 14

363

IDR Questionnaire



F&R

高

低

Profitability

高

低

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Internal communication


Tax / Finance Dept. Operating Dept. Effective Communication

The Final Measures

Interview &F&R Analysis

Interview &F&R Analysis

R&D

Manufacturing

Sales & Marketing

After sale services

Management & Administration


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Financial Analysis

Financial Analysis

► Review incl. number matching-up with RPT report

► Segmentation

► Special factor analysis & adjustment

► Capital adjustment (SAT approval)

TPM Selection

TPM Selection

TPMTPM

CUPCUP

RPRP

CPCP

TNMMTNMM

PSPS

TargetTarget

PricePrice

Operating Profit

Operating Profit

Gross Profit

Gross Profit

PLIPLI

Unit PriceUnit Price

OM NCP

Berry RatioROA/ROE

OM NCP

Berry RatioROA/ROE

GM

GCP

GM

GCP

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EconomicAnalysis

EconomicAnalysis

-15%

-12%

-8%

1%

9% 9%

14%

18%

Median7%

2%

Upper

Quartile

-3%

11%13%

C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12 C13

Lower

Quartile

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TP Documen-tation

TP Documen-tation

► Stamped with official chop and signed or sealed by legal representatives► In Chinese

HighlightsUpon request, or obliged to provide under investigation, sufficient and professional explanation and discussion with the tax bureau is a strong plus for the report.

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C. TP master file



Language Localization

TPM Localization

PLILocalization

Comparable SetLocalization

Taxpayer with TP Documentation master file

Taxpayer without but would be effective to haveTP Documentation master file

Economic analysis update only

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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 2000. 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.

中税 CTACChina Taxation Agency Co., LtdChina Taxation Agency Co., Ltd

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Ning SongSenior Partner

Tel：＋86 10 8235 6420-696Fax：＋86 10 8235 0239Mobile： +86 139 1122 9212Email： [email protected]

CTAC speaker

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 Master degree and LL.M. in Taxation.

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Prince WangTax manager

Tel：＋86 10 8235 6420-663Fax：＋86 10 8235 0239Mobile： +86 131 2117 4565Email： [email protected]

CTAC speaker

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.

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Q&AQ&AThanks!Thanks!


Documents

Special Tax Adjustment LOGO Implementation Measures · Transfer Pricing Audit Procedures Investigation TP Documentation Highlights Enterprises can provide TP Documentation during