Transfer Pricing: a 100 million RMB Tax Adjustment Case to a Pharmaceutical Company

Posted by on March 20, 2013 under Transfer Pricing | Be the First to Comment

Beijing municipal office of SAT recently released an article entitled Beijing Municipal Office of SAT Finished the First Transfer Pricing Investigation to a Pharmaceutical Company(the related links: http://www.bjsat.gov.cn/bjsat/ssxc/gzdt/201301/t20130130_101662.html). According to this article, the tax authority obtained the company’s overall business structures and related transaction modes through detailed interviews on all departments’ function and risk aspects. Based on analysis of company’s fundamental data, the tax authority eventually worked out a special tax adjustment scheme which contained a 10-year tax adjustment and managed to collect tax over 100 million RMB.
1. Profits shall match with Risks
Generally speaking, profits shall match with risks. The more profits the company gains, the more risks it bears. According to Implementing Measures for Special Tax Adjustments (Trial), enterprises whose profit levels obviously do not match with the functions performed and the risks assumed would be selected to be key targets of transfer pricing audit. Therefore, hwuason lawyers suggest the company adjust the relationship between profits and risks properly in order to avoid potential tax adjustments risks.
In addition, to enterprises who perform processing and manufacturing functions only, they shall not be responsible for any risk and loss incurred due to wrong decision-making, etc. And such companies shall maintain certain level of profit margin pursuant to Article 39 of Implementing Measures for Special Tax Adjustments (Trial).
2. Function and Risk Analysis
The function of a company may vary in related transactions. To be more precise, such functions may include research and development, design, purchase, processing, assembling, manufacturing, stock management, distribution, after sales service, advertising, transportation, warehousing, financing, financial, accounting, legal, human resources management, etc. And the related risks may include research and development risk, purchase risk, production risk, distribution risk, marketing promotion risk, management risk, financial risk, etc.
The function and risk of a company may largely involve its price in related transactions. And such aspect is also a key factor in comparable analysis and may affect the scope and choice of comparable companies. Therefore, it is highly recommended that company pay special attention on function and risk analysis in both transfer pricing investigation and contemporaneous documentation.
3. Potential Risks
(1) Special Tax Adjustment
According to Regulations on the Implementation of Enterprise Income Tax Law of the People’s Republic of China, if the business transactions between an enterprise and its related party violate the arm’s length principle, the tax authority is entitled to make taxation adjustments within ten years after the taxable year when the transaction is conducted. In this case, the tax authority adjusted the company’s related transaction by ten years.
(2) Back Taxes and Late Interests
According to Implementing Measures for Special Tax Adjustments (Trial), the company shall pay overdue taxes and interests after special tax adjustments and such expenses are not allowed to be deducted before enterprise income taxation. In this case, since the adjusting periods are quite long, its late interests may add up to quite a significant number. Therefore, hwuason lawyers suggest company attach great importance to the pricing strategy in related transactions and strictly follow arm’s length transaction principle to avoid potential adjustment risks.
(3) Follow-up Administrations
According to Implementing Measures for Special Tax Adjustments (Trial), tax authority shall conduct follow-up administration activities in five years since the transfer pricing adjustments. Therefore, the pharmaceutical company in this case may be subject to follow-up administrations in five years accordingly.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Inspur Software: Pay Overdue Taxes of 208,331,333.38 RMB Due to Special Tax Adjustments

Posted by on March 12, 2013 under Transfer Pricing | Be the First to Comment

Shandong Inspur Software Co., Ltd. announced that it received a document from its wholly owned subsidiary Shandong Inspur Communication Systems Limited, regarding some special tax adjustments of LGEYT in February. LGEYT, whose 30% of shares were held by Inspur Communication, received a Special Tax Adjustments Notice issued by Yantai Municipal Office, SAT. The local tax authority decided to adjust LGEYT’s transfer pricing by increasing its taxable incomes and required the company to pay overdue taxes amounting to 208,331,333.38 RMB from the taxable year 2007 to taxable year 2010. In addition, the company needed to pay such taxes within 90 days on receipt of the notice.
1. Pay Taxes before Legal Proceedings
According to Rules on Taxation Administrative Review (Order of State Administration of Taxation No.21), applicants are able to apply for administrative review on condition that they first pay taxes and overdue fines or provide relevant guarantees with respect to the authority’s tax collecting behavior. What’s more, Administrative Review is an essential procedure prior to Administrative Procedure.
Therefore, company has to comply with the law and pay taxes as required before further legal remedies when receiving such notices. And Hwuason Lawyers strongly remind the company about the time limits. Usually such time limits in administrative procedures are relatively quite short compared with civil or criminal procedures. If the company missed such deadlines without reasonable excuses, unfortunately, it could no longer apply for any legal relieves.
2. Select Proper Legal Proceedings
The law provides many different remedies for taxpayers to defense their legal interests. And each remedy has its own specialties and suits for certain type of cases. In fact, selecting a proper legal procedure plays an important role in solving company’s tax issues. Sometimes the companies may easily ignore certain remedies and think they have to win the case through expensive and time-consuming procedures.
On the contrary, we always assist the company to get rid of such accustomed thoughts and demonstrate our ideas through practices or prior cases. A couple of weeks ago, we have just finished a significant case by resorting to a hearing procedure. In that case, the company followed our advisory, seized the opportunity to apply the procedure within the 3-day limits and finally persuaded the tax authority to withdraw its Administrative Penalty Notice. The case seemed to be sort of breakthrough and the company was obviously quite satisfied with the outcome since the whole tax issue was solved within less a week.
3. Fully Prepared for Legal Proceedings
The tax authorities anywhere are not easy to cope with. And they may rebut taxpayers’ requests due to lots of reasons. As for some procedural issues, companies may look through the official websites of the tax authorities for detailed information. As for some substantial issues, Hwuason Lawyers suggest the company to seek professional advisories since it may directly affect the tax burden of certain transactions. In addition, companies shall also prepare adequate materials to support their claims which may also deeply affect the outcome of some cases.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Anti-tax Avoidance: Transfer Pricing via Intangible Assets

Posted by on February 26, 2013 under Anti-Avoidance, Transfer Pricing | Be the First to Comment


It is reported that Guangdong Provincial Office of State Administration of Taxation succeeded in dealing with a transfer pricing case about a large retail enterprise after two years investigation. In this case, the tax authority finally adjusted the retail enterprise’s taxable income by increasing 198 million RMB, which leaded to the company paying back taxes amounting to 60 million RMB. In fact, this is the first anti-avoidance case in China concerning intangible assets such as trademark, goodwill, etc. After several rounds of investigations and negotiations, the retail enterprise eventually accepted the adjustments proposed by the tax authority and agreed not to deduct the expenses on goodwill with respect to its related parties, which could amount to over 100 million RMB. After the adjustments, the amount of the retail enterprise’s related tractions decreased by 60% and the enterprise’s profit improved significantly.
1. Long-term losses or low profits may lead to anti-tax avoidance adjustments
In 2009, Guangdong Provincial Office of SAT found that the sales revenues of the retail enterprise kept increasing each year, however, its profits didn’t increase correspondingly. After detailed investigation, the tax authority discovered that the company’s administrative expenses expanded dramatically which resulted in the low profits. In fact, since 2004, the company has made several payments to its foreign related companies via royalties and consulting services fees, which reached 1% of the company’s annual sales income each year. This raised the tax authority’s attention and caused the anti-tax avoidance investigation by the authority.
In practice, long-term losses or low profits are always important indicators which may actually raise the local tax authorities’ attentions. And many anti-tax avoidance cases began with such unusual financial indicators. Therefore, Hwuason Lawyers suggest that company shall pay special attentions to its financial indicators and their relations, such as sales revenue, profits, amount of related transactions, etc.
2. Emphasize on the preparation of contemporaneous documentations
According to Implementation Measures for Special Tax Adjustments (Trial), enterprises shall prepare and provide their contemporaneous documentations on their related transactions to the tax authorities.
Generally speaking, contemporaneous documentations mainly consist of five important parts, namely organizational structure; business operation briefing, related transactions briefing, comparability analysis and selection of transfer pricing methods. Moreover, each of the five parts in such report has a number of detailed requirements. Therefore, contemporaneous documentations actually contain various materials involving all aspects of company’s related transactions. And their preparation process is quite complex and contains many professional analysis which are highly technical.
As for some companies, they are not aware of the importance of contemporaneous documentations. They think they have already submitted the required documents and that is enough. However, on the contrary, contemporaneous documentations are important approaches for tax authorities to acquire necessary information. And tax authorities may rely on these reports to conduct their further investigations if they discover something unusual in the reports. Therefore, we suggest the company attach great importance on the preparation of contemporaneous documentations. And if the company happens to experience unusual changes or huge fluctuations, it shall provide adequate explanations to such phenomenon so as to reduce potential risks of being inspected or adjusted by the tax authorities.
3. Avoid transfer pricing risks via advance pricing arrangements
As we known, it is quite difficult for both companies and tax authorities to precisely assess and decide the value of certain intangible assets. And disputes may easily arise since both parties can hardly reach unanimous agreements on the pricing methods of intangible assets. In order to avoid potential transfer pricing risks and improve the certainty of business operation, Hwuason Lawyers suggest company struggle to reach advance pricing agreements if possible. And we believe that companies are likely to reach such agreements provided with positive attitude and adequate negotiations. In addition, since the provisions of tax laws regulating intangible assets are quite general and ambiguous, we suggest the company to maintain effective communications with the tax authorities and seek tax professionals’ advisories about some uncertain or controversial issues so as to ensure the compliance of related transactions.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Starbucks’ Transfer Pricing Affairs: Company should Reconsider its Tax Bill

Posted by on December 12, 2012 under Corporate Tax Planning, Transfer Pricing | 5 Comments to Read

Starbucks, the largest café chain globally with a market capitalization of $40 billion, reported zero profit, and paid zero income tax on sales of 1.2 billion pounds in UK over the past three years, reported by Reuters. However, its nearest UK rival, Costa, paid 15 million pounds (30.5% of its profits) with a similar amount of sales in 2011.
The huge disparity causes strong protest among those who pay their taxes in full. Angry customers have already boycotted the coffee chain and urged people to avoid its 735 UK stores, which will definitely have significant negative impacts on its coffee sales. Meanwhile, train operator CrossCountry said it might stop selling Starbucks coffee on its services, and a new poll found that the coffee chain’s brand had taken a “disastrous” hit.
Responding to the widespread anger of the public, the public accounts select committee asked Starbucks to explain structures and transfer pricing arrangements. And Starbucks global chief financial officer Troy Alstead and UK managing director Kris Engskov was required to give evidence before parliamentary committee.
To relieve the embarrassing situation and win back the favor of customers, Kris Engskov, managing director of Starbucks UK, promised to pay a significant amount of corporation tax during 2013 and 2014 regardless of whether the company would be profitable during these years.
Seen from the Starbucks case, one could sense the difficulties in dealing with tax issues and its serious consequences when handled improperly. Therefore, Hwuason Lawyers suggest that companies especially with multinational operations should be aware of the potential tax risks and pay attention to the following aspects.
1. Face the loss when it actually occurs
Losses and expenses can be deducted when it actually occurs during the operation of a company. And it is acceptable that Starbucks pay certain mount money as consideration to use intellectual property, services, etc. and deduct those payments which actually reduce the company’s taxable income. Therefore, just make sure it complies with the relevant regulations or rules when you claim to deduct it.
2. Aware of the potential risks
A company should be alert about the potential risks when its margin is unfortunately far below the industry’s average margin. And things may be even worse when a company suffers sudden huge losses compared with the previous large profits or suffer consecutive years of losses while still maintaining or even expanding its operation, because such situations could easily arise authorities’ suspicious of evading tax.
Trapped in the above mentioned situations, a company should first be high aware of its position and then carefully review its structure and operation, especially payments between companies within the group, like intangible assets. In Starbucks case, the royalty fee, charged as high as 6% of total sales, could be likely to attract the investigators’ attentions. Finally, it will be much better if the company could prepare sufficient materials in advance in case of inquiry, which may materially reduce the tax risk from a tax lawyer’s perspective.
3. Pay the right amount of tax
Striving to maintain the balance to operate a profitable company with a social conscience is no easy task, especially in a slowing economy. However, a company should still take the tax issues seriously and strictly obey the tax law to pay the right amount of tax, though under great pressure of making profits. Turning a substantial gain into a loss to avoid tax is unacceptable and the company will eventually bear those negative consequences both in the legal sense and in the commercial sense.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). Or you can visit our website at www.hwuason.com.

About us

Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

 

Real Estate VAT introduces Transfer Pricing Mechanism in Anti-Tax Avoidance

Posted by on February 29, 2012 under Anti-Avoidance, Transfer Pricing | Be the First to Comment

In early 2012, real estate related VAT is listed as the priority of anti-avoidance assignments this year. The malpractice in land VAT has a long history due to the flexibility, long time span, and operationmode of real estate projects. One taxation official declared that the best performance of this anti-avoidance event, the government will collaborate with land managing authority, housing department. However, since the sales in housing market are declining, measures on anti-avoidance may also be amended.
1. Malpractice in Land VAT
Collective anti-avoidance event is not a macro-economic tool to regulate land VAT malpractice. Real estate enterprises used to avoid land VAT by falsify the development cost in their accounts. Land development cost, construction and installation cost, Property Company fees are typical malpractice. Through the development of real estate enterprises, this avoidance approach via related companies is no longer popular. It is more notable that real estate enterprises are avoiding taxation from exchange pricing. It is usually the case that Real Estate Company conceals or falsifies land price, presses real estate price or puts up evaluation prices, or decreases the project scope, costs and other fees to avoid tax in transactions.
2. Upgrade in the Inspections on land VAT
The business cycle in real estate companies is long and flexible. Consequently, respective project costs are various and complex. In general, the tax inspection is yearly based. But, real estate enterprises take developing projects is a longer time span and spurs over more than one administration units. Local taxation departments will strike hard to conduct through inspection. In the special collective anti-avoidance event, development cost, business tax account and additional business tax in related companies will be the focus of the land taxation bureaus.
Local leadership has implied inspections in “development cost” account, indirect cost among related companies, and development product account. For BT, taxation bureau should exam the installment payment plan in development product.
It is a creative policy to take land VAT into account in anti-avoidance actions. Real estate enterprises should be aware of such treatment in terms of any tax risks in the near future.