tp presentation china 260712
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Pricing and Taxation of Transactions between Related Companies in Israel and China – Transfer Costs MBA Yariv Ben-Dov, Partner economist in BAR ZVI & BEN DOV LAW OFFICES, international expert in Transfer CostsTRANSCRIPT
Intercompany Transactions with Related Chinese Entities
Yariv Ben-Dov LLB, BA (Eco), MBA
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About BarZvi & BenDov
o Established in 2006
o Unparalleled results - 100% acceptance rate of the studies by international tax authorities
o Intercompany agreements
o Implementation
o Global Reach: Transfer Pricing Associates – affiliates in Shanghai and Hong Kong & additional representatives in over 50 countries
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China – Quantum Leaps
o No longer merely a source for cheap labor and contract manufacturing
o Significant national R&D spending (#3 in the world) with 20% annual increase
o Tax incentives for companies engaged in R&D
o Governmental “Made in China” requirements
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China – General Corporate Taxation
o One law for domestic and foreign owned companies
o Corporate tax rate – 25%
o Tax withheld on interest paid to foreign companies – 10(7)%
o Tax withheld on royalties & technical services fees – 10%
o Withholding tax on dividends – 10%
o Net operating losses carry forward – 5 years
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Introduction to Transfer Pricing
o (Cross border) transactions between related parties
o The “arm’s length” principle: transactions between related parties should be under the same terms as transactions between third parties.
o Strong focus by Tax Authorities worldwide (“Fair Share”)
o Arm’s length is the predominant principle in major TP legislations such as US, OECD, Israel, China, etc.
o Documentation requirements
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Intercompany Transactions
o A broad definition which includes:
● Sale (transfer) of tangible property
● Utilization/transfer of intangible assets
● Provision of services (e.g. management, marketing, tech. support, assembly/manufacturing etc.)
● Financial transactions (e.g. loans, capital notes, ESOP, etc.)
● Business restructuring
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“Special Relationship” Threshold
o Israel – 50% or control
o China – broad definition which incorporates control over business decisions/intangibles
o Documentation requirements & disclosure forms
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Transfer Pricing Legislation
o Regional and Local TP legislations - US, OECD, Israel, EU, etc.
● Israel – Section 85A of the Income Tax Ordinance
● China – Chapter 6 of the New Corporate Income Tax Law
o Documentation requirements:
● TP Study
● Intercompany agreements
● Implementation
● Compliance forms (Form 1385 in Israel, 7 forms in China)
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Chinese TP Regulations Overview
o OECD methodology is generally accepted
o No “reversed burden of proof”
o 7(!) annual disclosure TP related forms
o Limited loss making companies must submit documentation
o Max thin capitalization – 2:1
o No standard approach by tax authorities
o Management fees not deductible
o APA program
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Common Audit Targets (Circular 2)
o Intercompany transactions with tax havens
● Israel may be treated as a Tax Haven due to various tax incentives (OCS, approved enterprise, etc.)
o Did not submit TP related disclosure forms
o Numerous intercompany transactions
o Low risk entity with consecutive losses
o Low profitability levels
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Penalties in China
o Special interest on adjusted amounts
o Adjustments to financial reports
o Surcharge on unpaid tax accrued on a daily basis
related TransactionUn
3rd party
Manufacturer Israel Co.
3rd Party
Customer
Products Products
o Transaction is at arm’s length
o “Fair Share”
Contract Manufacturing Transaction
China Co.
[Manufacturer] Israel Co.
3rd Party
Customer
Products
Products
o Is the transaction at arm’s length?
o “Fair Share”?
o How to determine the arm’s length price?
Transfer
Price
Contract Manufacturing + Sales
China Co.
[Manufacturer] Israel Co.
3rd Party
Customer in
China
Products
Products
o Is the transaction at arm’s length?
o “Fair Share”?
o Sales rep. – permanent establishment?
o Intercompany finance (loan)
Transfer
Price Sales Rep.
Independent Transaction?
Israel Co.
[IP Holder]
China Co. [Manufacturing
+ Distribution]
3rd Party
Customer in
China
Products
o Is the transaction at arm’s length?
o “Fair Share”?
o What about Israel Co.?
Know How
Royalties
Questions?