China Tax Update
Asia Tax Executives Forum
China Tax Panel
9th May 2012, Singapore
Peter Guang Chen (Vice President, Asia Pacific)
Charles River Associates
Jocelyn Lam (Executive Director)
Goldman Sachs
Baker Lihua Li (Senior Tax Manager, North Asia)
Damco (part of A P Moeller / Maersk)
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Agenda
CHINA: What you can do to keep in step with rule changes
 The move towards GST; the Shanghai VAT pilot programme
 China’s tax treaties - new developments
 Indirect Transfers and Circular 698
 The experience of China’s direct tax reform in 2008 v India’s in 2012
 Recent Transfer Pricing Developments
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Copyright © 2012 CRA International
The move towards GST
Shanghai’s VAT pilot programme
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Shanghai’s Pilot VAT Programme
 On Nov 17 2011, Caishui [2011] No.110 and Caishui [2011] No.111
were jointly issued by the SAT and MOF
 The implementation and transitional rules has taken effect since 1
January 2012
 At current stage, only certain industries in Shanghai are subject to the
pilot program
 The concept is that for services and other types of income which are
now subject to the Business Tax (“BT”), they will now be subject to the
Value Added Tax (“VAT”)
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Shanghai’s Pilot VAT Programme
Pilot Industries
Applicable VAT Rate
Tangible movable property leasing services
17%
Transportation Service Industry
11%
Research, development and technical services
Information technology services
Cultural creative services
6%
Logistic auxiliary services
Certification and consulting services
Other than the above, other services or activities which are now under the
existing Business Tax (BT) regime are still subject to BT
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Shanghai’s Pilot VAT Programme
For overseas entities providing services to customers in China, and who
are subject to the Pilot VAT programme:
 The VAT withholder is generally the service recipient, if the overseas entity
does not have an agent in China
This is consistent with the existing rules on Business Tax
 VAT liability = (total amount to be paid by service recipient)
rate) x VAT rate
÷ (1+ VAT
 The VAT withheld will become an “input credit” which the service recipients
in China are allowed to claim the VAT withheld for the overseas entities as
its own input VAT credit
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Shanghai’s Pilot VAT Programme
Perspectives from the financial services industry
 Although FS is outside the scope of the Shanghai Pilot VAT programme, it is
nevertheless affected through its dealings with vendors which are in the pilot
programme
 Discussions between the MOF / NPC with various industry groups as to
relevant rules for the financial services industry
 How should the industry be preparing itself, in anticipation of the VAT Pilot
program to be adopted by Beijing as early as 1st July 2012, and the nationwide
roll out by 2015
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Shanghai’s Pilot VAT Programme
Perspectives from the forwarding / shipping industry
 The forwarding / shipping industry is one which is directly affected by the Pilot
VAT programme in Shanghai
 Practical issues due to the pilot programme on the transportation / shipping
industry
 VAT exemption on service export, Import activity from overseas party
 the financial subsidy programme which local government aim to offer to the
company whose tax burden is negatively affected.
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China:
Tax Treaties Development
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China – Tax Treaties & TIEA – Recent Developments
In the last 12 months
 Income Tax Treaties / Arrangements:
o 7 income tax treaties “entered into force” or became “effective: Uzbekistan,
Zambia, Syria, Macau, Czech Republic, Malta, Turkmenistan
o 2 protocols / treaties were “signed”: United Kingdom, Latvia
o 1 protocol’s “negotiation was finalized”: Canada
 Tax Information Exchange Agreements (“TIEA”):
o 5 TIEAs “entered into force” or became “effective”: Bermuda, Jersey,
Argentina, BVI, Guernsey
o 1 TIEA was “signed”: Cayman Islands
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China – Treaties/Protocols signed/negotiated
Country
Treaty / Protocol
Negotiation
Concluded
within last 15 months
Signed
Entry into
Force
Apr 18 2011
Dec 30 2011
Dec 30 2011
Pending
Pending
Pending
Effective
Uzbekistan
Protocol to 1996 treaty
Canada
Protocol to 1986 treaty
Botswana
New treaty
Apr 11 2012
Pending
Pending
Zambia
New treaty
Jul 26 2010
Jun 30 2011
Jan 1 2012
Syria
New treaty
Oct 31 2010
Sep 1 2011
Jan 1 2012
Macau
Protocol to 2003
arrangement
Apr 26 2011
Oct 8 2011
Jan 1 2012
United Kingdom
New treaty (to replace
1984 treaty)
Jun 27 2011
Pending
Pending
Latvia
Protocol to 1996 treaty
Aug 24 2011
Pending
Pending
Aug 28 2009
May 4 2011
Jan 1 2012
Oct 18 2010
Aug 25 2011
Jan 1 2012
May 14 2009
Mar 30 2010
Jan 1 2011
Feb 11 2012
New treaty (replaces the
Czech Republic
Malta
Turkmenistan
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1987 treaty between China and
the former Czechoslovakia)
New treaty (replaces 1993
treaty)
New treaty
Copyright © 2012 CRA International
China – Treaties/Protocols signed but not yet “EOF” or in effect
As of 9th May 2012
Country
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Treaty / Protocol
Signed
Entry into
Force
Effective
Belgium
New treaty to replace
1985 treaty
Oct 7 2009
Pending
Pending
Ethiopia
New treaty
May 14 2009
Pending
Pending
S. Korea
Protocol to 1994 treaty
Mar 23 2006
Pending
Pending
Latvia
Protocol to 1996 treaty
Aug 24 2011
Pending
Pending
New Zealand
Protocol to 1986 treaty
Oct 7 1997
Pending
Pending
United Kingdom
New treaty to replace
1984 treaty
Jun 27 2011
Pending
Pending
Copyright © 2012 CRA International
China – Income Tax Treaties – Recent Developments
 The: “beneficial ownership” requirement of Circular 601 in claiming
treaty benefits
o Is “beneficial ownership” requirement applicable in Treaty /
Double Taxation Agreements (DTA) capital gains tax relief
claims, despite the fact that neither the Chinese domestic law
nor the Circulars issued by the SAT treat “beneficial ownership”
as a qualifying criterion for treaty capital gains relief
o May “substance” within the “group” support a claim for treaty
benefits?

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In mid-2011, a draft to clarify Circular 601 was released by
the SAT to the tax industry and outlined certain situations
where a claim can be made on the basis of substance in
group holding companies. The draft circular, is still under
discussion and it is uncertain when it will be finalized and
made official
Copyright © 2012 CRA International
China – Income Tax Treaties – Recent Developments
 Practical experience in audit situations after the issuance of Circular 75 - the
triggering of “permanent establishment” status in secondment arrangements
o Interpretation of PE concept
o Service PE:
 Connected projects
 Calculation of 183 days/6 months
 The 12 month holding period requirement for entitlement to reduced rate
dividend withholding tax rate – the reason why a Luxembourg company’s
application for treaty benefit was denied by the SAT in September 2011
o Circular 81 (Guoshuihan [2009] 81] laid out the 12 month rule in 2009.
Then, Circular 75 (Guoshuifa [2010] 75) was issued to interpret the
China – Singapore tax treaty, and discussed the 12 month rule of
Circular 81 at length. However, Circular 75’s interpretation can apply to
any treaty with similar provisions to the Singapore treaty, such as the
one China has with Luxembourg, which has the almost identical
language as the Singapore treaty on the dividend withholding rate.
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Copyright © 2012 CRA International
Update on Circular 24
Bulletin No. 24, issued by China SAT in 2011

Circular 24 was issued to clarify withholding tax obligation of nonresident taxpayer
o
o
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Impact on passive income (e.g. dividend declaration)
Impact on service income (e.g. central charges)
Copyright © 2012 CRA International
China:
Indirect Transfers and
Circular 698
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Indirect Share Transfers – Circular 698
Background
Historically, transfers of FIE shares among affiliates were permitted at cost
EITL: FIE equity shares transferred in restructurings must now be effected
at fair value
Circular 698
 Targets practice of transferring intermediate holding companies that hold interest
in FIE shares
 Imposes extensive reporting requirements in certain cases
 SAT can disregard intermediate holding company
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Indirect Share Transfers – Circular 698
Implications of the Vodafone Decision
 Vodafone as potential inspiration for Circular 698
 Overview of Indian Supreme Court decision in favor of taxpayer
 Certain distinctions minimize importance of decision for Chinese tax
 Potential reference for SAT regarding prospect of competent authority
disputes
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Indirect Share Transfers – Circular 698
 Update on enforcement actions by SAT
 January 2012 (published) case from Shanxi resulting in RMB 403m in
PRC tax collected from a transfer of HK company
 SAT’s 4th May 2012 meeting on supplementary circulars in Xiamen
 Trends and impact on existing and future planning of investment
structures by MNCs
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China:
Tax Reform Experience
of China as compared to
India’s Proposals
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Tax Reform – China vs India
Thoughts from our panelists:
 Differences: China is to align the foreign and domestic tax regimes
and lower tax rates. India does not have same objective
 Similarities: codifying GAAR which leads to controversies and
industry lobbying in treaty claim context
 Impact on how fund investment/ market access products should be
structured, and leading to increased need for treaty/ competent
authority
 China’s focus: more on quality than speed in economy development
o
o
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MNCs VS. SOEs
High-tech and certain encouraged industry (e.g. offshore service
sourcing)
Copyright © 2012 CRA International
China
Recent Transfer Pricing Developments
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China – Transfer Pricing Highlights
Audit Targets for 2012
 Audit Targets Announced by Jibianhan [2012] 1. An internal document
that instructs the local tax authorities to perform mandatory and
voluntary tax investigations in 2012, specifically including:
o
o
o
o
o
o
taxpayers that conduct capital transactions
enterprises that receive VAT special invoices from purchases of refined oil
nonresident enterprises engaged in financial industry
real estate developers and construction and installation companies
local commercial banks
high-income individuals
 Local tax authorities instructed to close more than 90 percent of
selected investigation cases and to collect more than 90 percent of
unpaid tax audit income this year
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China – Transfer Pricing Highlights – recent events
Nationwide transfer pricing database project

Started In 2012, SAT is establishing a system which will contain nationwide
information on related-party transactions and contemporaneous
documentation. It will allow the SAT to conduct comparative analyses on
related-party transactions conducted in different industrial sectors, tax years,
and geographical areas
APA statistics and performance

At the end of 2011, 120 companies have applied for bi-lateral APAs
o In 2011 China has conducted 10 bilateral discussions with seven countries
including the US, Japan and Korea on 29 APAs and corresponding
adjustment cases
o However, only seven of them have reached consensus through MAP

On April 12, 2012, the SAT released the second annual APA report, covering
periods from 2005 to 2010
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Indirect Share Transfers – Circular 698
SAT Propensity to Attribute Premium Value to Chinese Assets
 Valuation analyses may need to address “premiums” assigned to
Chinese assets by the SAT
 SAT rationales for premiums may include:
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o
Location savings
o
Marketing intangibles associated with Chinese customers
o
High expected growth rates
Copyright © 2012 CRA International
China – Transfer Pricing Highlights – recent events
China’s first Thin Capitalization Audit Case Concluded
 In Dec 2011, it was reported that the SAT concluded its first thin capitalization
case in Shanxi Province made a tax adjustment of more than CNY 30 million
(about US$4.72 million)in enterprise income tax on a Chinese subsidiary of a
Japanese multinational company
 The Chinese subsidiary of Japan MNC maintained debt-to-asset ratios of
91.26 percent in 2007, 87.32 percent in 2008, and 93.86 percent in 2009
SAT’s Transfer Pricing headquarters – personnel shortage
Self Assessment requested of many multinational companies by the SAT
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Copyright © 2012 CRA International
China – Transfer Pricing Highlights – Cost Sharing Arrangements
Cost Sharing Arrangements (CSA) in China
Regulatory Background
Enterprise Income Tax Law (EITL)
 Article 41, paragraph 2 provided statutory basis for Cost Sharing arrangements .
Also see the EITL’s Implementation Regulations (EITL.IR Article 112)
Special Tax Adjustments (STA) – Implementation Measures
 Chapter 7 provides detailed regulations on the administration of Cost Sharing
arrangements in China
 Within thirty (30) days from date that CSA (cost sharing agreement) is reached,
CSA to be submitted to the SAT. SAT to submit for examination and approval.
 Contemporaneous Documentation requirement for CSA, provided for in Article
74 of the STA Implementation Measures. Documentation to be submitted by
June 20th after year end.
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China – Transfer Pricing Highlights – Cost Sharing Arrangements
Cost Sharing Arrangements in China
 Many companies are transferring R&D and service functions to China,
establishing global R&D and shared service centers
 China is also now seen as a desirable market for many MNCs
 MNC’s subsidiaries in China increasingly performing marketing and brand
building of their products for the China market
 Cross border payment of royalty fees and service fees are subject to income tax
(ie. the EIT) withholding at 10% and also Business Tax 5.5%*
 Cost sharing can reduce inter-company royalty and service fee payments –
Resulting in lower income tax (EIT) and Business Tax withholdings
 Cost sharing can also reduce capital requirements of China subsidiary in some
cases
 Special challenges in calculating payments under CSAs in China
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China – Transfer Pricing Highlights – Cost Sharing Arrangements
Cost Sharing Arrangements in China – the buy in payment issue
 In China, the SAT’s regulations do not provide guidance on how to use specific
methods to determine arm’s length transaction value (转让定价方法，以确定市
场价格)
 Buy In payments
o Comparable uncontrolled price method is generally not preferred by tax
authorities
o In the USA, the income method is commonly used and accepted by the IRS
o Under income method: calculate NPV (net present value) of future stream
of non-routine cash flows from use of pre-existing IP
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China – Transfer Pricing Highlights – Cost Sharing Arrangements
Cost Sharing Arrangements in China – the buy in payment issue
 In China, SAT does not list specific methods to compute buy in payment
 No current consensus of what will best satisfy the SAT, however, following
factors are much focused on:
o How future economic benefit is predicted and measured
o Costs pool allocation – excluding stewardship expenses, and costs which
are not of direct benefit to IP development
o China’s cost advantage and market premium (成本优势和市场溢价) to be
considered as to effect on buy in payment and cost sharing contribution
payment
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Copyright © 2012 CRA International
China – Transfer Pricing Highlights – Cost Sharing Arrangements
Cost Sharing Arrangements in China
No CSA
CSA
Parent
(USA)
Parent
(USA)
Licensing
fees /
royalties
payment
Licensing
agreementuse of IP
Subsidiary
(China)
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EIT
BT /
VAT
CSA
entered
into
Buy In
payments
Subsidiary
(China)
Copyright © 2012 CRA International
Appendix
Intercompany Payments
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Inter-Company Charges with Affiliates in China
When structuring an inter-company charge with an affiliated company
in China, many factors have to be considered in advance
 Regulatory restrictions on particular economic activities
o Examples: Financing activities / Outbound Lending
o Dividend distribution limitation (i.e., accounting profit requirement)
o Capital repatriation generally not permitted
 Foreign exchange control
o Only permitted categories of payments are remittable
o Various document requirements
 Tax
o Requirement to obtain tax clearance certificate in many cases
o Cost: income tax (EIT), Business Tax (BT), Value Added Tax (VAT)
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China
The extremely restrictive regulatory environment governing repatriation of
cash out of China leads to the following phenomenon:
o “trapped cash” at many multinationals in China
o Because of the perceived difficulty of repatriating cash from affiliated
companies in China, there is a tendency for multinationals to “keep
profits low” at their China subsidiaries through transfer pricing
arrangements and various type of inter-company charges against the
China subsidiary / affiliated company
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China
Profits Repatriation – Conditions for Dividend Declaration
Accounting Profits
Common Misconception:
It is difficult to take profits out of China!
Settle Income Tax
Offset prior year loss, if any
Provide for statutory
after-tax reserves
Distributable Profits
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To remit dividends to parent company, the
following are to be submitted to the bank:

Tax return copy

CPA audited financial report

Resolution of Board of Directors

Foreign Exchange registration certificate

Credit report prepared by accounting firm
Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China
The major objectives to achieve, when structuring inter-company charges
with an affiliated company in China are:
 The payor (ie. the China affiliate) can claim a deduction against its
corporate income tax (the Enterprise Income Tax “EIT”)
 The payee (ie. the non-Chinese recipient) is not subject to excessive tax
in China
 The China tax paid can, if possible, be credited against the payee (ie.
the non-Chinese recipient)’s home country tax
 Payment can be remitted by the payor out of China through the banking
system, clearing the hurdles of foreign exchange controls (as
administered by SAFE “State Administration of Foreign Exchange”)
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China
How transfer pricing arrangements can affect or be affected by the
structuring of inter-company payments in China?
 For inter-company payments other than the buying and selling of
merchandise, the inter-company pricing can be challenged when a tax
clearance certificate is required. The result can be that if the tax
authority is not satisfied with the inter-company price (for example, a
royalty charged against the Chinese affiliate), then the payment simply
cannot be remitted outside of China
 Due to the imposition of both income tax (EIT) and other turnover taxes
(such as Business Tax and/or VAT), there is pressure on multinationals
to re-characterize certain outbound payments by affiliates in China
 Getting the “transfer pricing” arrangement wrong, will be costly not just
because of “corporate income tax” (EIT), but as a result of the turnover
taxes also
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Copyright © 2012 CRA International
Appendix
Recent Cases on
Intercompany Payments
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Inter-Company Charges with Affiliates in China - Examples
Example 1 – the “G-UK” Company
Facts
G company is a UK company which owns valuable technology, some of which has
been patented. It has a subsidiary in China “G-China”, which has in the past
manufactured the products for G-UK, and then immediately sold the manufactured
products to G-UK. G company is part of a large multinational group, and is subject to
financial reporting in the US.
In the last 2 years, however, G-China began selling some of G-UK’s products in
China. However, G-UK has not charged G-China any royalty / license fees for the
sale of its products (ie. the G-UK brands and the embedded technology, etc).
G-China has been profitable in the last few years, and has paid EIT in China at the
rate of 25% on its net profit.
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 1 – the “G-UK” Company (continued)
Problem:

From a TP standpoint, G-China should have been paying royalties to G-UK when
it began selling G-UK’s products in China. The risk is that the UK Inland Revenue
may, under UK’s TP rules, impute royalty income to G-UK, and therefore G-UK will
be liable for additional UK corporate income tax.

However, there is no ready mechanism in place for G-China to amend its prior
years’ tax returns, to adjust and get a refund for prior year taxes.
Consequences:

Immediate : G-UK and its parent company group is under pressure from its
auditors to provide for a tax expense provision reserve, for FIN 48 reporting
purposes in the US

Longer term: If G-UK is assessed additional UK corporate income tax, and if it
cannot readily obtain a refund of the EIT G-China has paid in China, then it will be
double taxed on the same income, for the group as a whole
Solution:
Is a competent authority proceeding / mutual agreement procedure (“MAP”) a
realistic possibility in this case, under the UK-China tax treaty ?

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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 1 – the “G-UK” Company (continued)
Competent Authority proceeding / MAP under the UK-China tax treaty

Under the existing UK-China tax treaty (1984), Article 25 provides for a competent
authority proceeding

There is a new UK-China tax treaty, signed but not yet effective. Article 25 in new
treaty has essentially the same provisions, except that there is statute of limitation
relief.

In theory, MAP proceeding can be initiated in the UK, or possibly, in China

If MAP proceeding is initiated in China, then Guoshuifa [2005] 115 (“GSF 115”
issued1st July 2005) will govern.

However, a competent authority proceeding is discretionary as to whether the tax
authorities will agree to commence one. Also, not all competent authority
proceedings result in agreement.
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 2 – the “L-US” Company
Facts

The L-US company is a multinational group in the software language localization
business, and is very profitable in its home country, USA. It has a subsidiary in
China, the L-China company. The L-China company provides services to various
customers, performing the Chinese localization of various major software
programs. Some of its customers are affiliated companies outside of China within
the L-US group.

The L-China company is required to prepare contemporaneous transfer pricing
documentation, because it’s intercompany transactions with affiliates exceed the
threshold requirement ( > RMB 40 million in fees payments), and has done so
since 2008. Under its TP documentation, L-China is described as not engaged in
“software development”, bur rather as simply engaged in certain programming
functions, and to perform minor modifications to certain parts of the software.

In 2010, under a circular Caishui [2010] 64, a company which performs
outsourcing in certain types of industry/functions, can obtain an exemption from
Business Tax (BT), on its “outsourcing business revenue”.
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 2 – the “L-US” Company (continued)
Facts (continued)
The “software development” business is one type of qualifying industry / function
which can qualify a company to have the Business Tax exemption under Caishui
[2010] 64. This is the only possibility for L-China if it wants to get the BT
exemption.

Problem

As the Business Tax (BT) rate is 5% (effectively 5.6%, if local surcharges are
added) on gross revenue, the tax exemption under Caishui [2010] 64 can provide
significant tax savings for L-China.

Can L-China maintain that it is in the “software development” business for
purposes of Caishui [2010] 64, without changing its TP documentation’s position
that it is not engaged in “software development” for EIT purposes?
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 3 – the “M” Company
Facts
 The M Company is engaged in the design, development and manufacturing of
integrated circuits (IC’s) and other electronic equipment. It has a subsidiary in
China, M-China, which has been in operation since 2009. M-China provides design
services solely for its parent the M Company.
 The M Company has not paid any service fees to M-China since its inception.
Therefore, M-China has not shown any revenue for the 2009, 2010 years, and
therefore operated at a loss for those two years. It is now February 2012, and the
management of M company decided that it should compensate M-China for the
year 2011 on a cost-plus basis (around cost + 10%). There is no inter-company
service agreement in place. The management is wondering whether they can do
so, and what problems, if any, should they anticipate.
Problem

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With the year 2011 year completed, and it is already February, it means that the
interim accounts of M-China have already been submitted to the local tax bureau,
without showing any revenue. Further, if service fees should have been charged
by the M Company against M-China during 2011, then invoices should have been
issued during the year, with the requisite Business Tax (BT) of 5.5% collected
from the customer, the M Company.
Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 3 – the “M” Company (continued)
Problem

Since the 2011 year is over, and it is already February, the interim accounts of
M-China have already been submitted to the local tax bureau, showing zero
revenue. Further, if service fees should have been charged by the M Company
against M-China during 2011, then invoices should have been issued during the
year, with the requisite BT of 5.5% collected from the customer, the M Company

If M-China now pays M-China a service fee of cost + 10%, for the year 2011, then
there can be late penalty and interest for the EIT tax and BT tax which should
have been collected and paid over during 2011

Also is it possible to, on the one hand, adjust M-China’s 2011 for financial
statement and taxable income, but yet without having the billings / official invoices
to show for it during 2011?
Solution

Official invoices showing the correct amount of BT or VAT should be issued as
soon as possible for 2012, based on an agreement for intercompany services
effective for the year 2011. A meeting should be arranged with the tax official in
charge at the local tax bureau, for a discussion of the matter on 2011 and prior
years.
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 4 – the “P” Company
Facts

The P Company is engaged in the sale of pet related products to customers within
Continent E. It obtains almost all of its products from unrelated factories and
suppliers in China. It has done its procurement through two Representative Offices
(RO) the P Company has in China. The P Company owns a number of patents
and trademarks it has developed for its products over the years.

P Company believes that there will be a significant increase in the consumer
demand for pet related products in China and the rest of Asia in the future.

In 2012, the P Company will establish a WFOE (Wholly Foreign Owned
Enterprise) in China, P-China, to replace the two ROs It will also set up a new
company in Hong Kong, P-HK. The plan is that the new WFOE will provide
procurement services to the P Company and P HK, and also will develop products
and brands for the China market, to which P-China will sell. P-HK is to develop
products and brands for the markets outside of China and the E Continent, and
will be responsible to sell to customers in those areas.
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Copyright © 2012 CRA International
Inter-Company Charges with Affiliates in China - Examples
Example 4 – the “P” Company Issues

What intercompany agreements are needed as between the P Company, P-China
and P-HK?
Possible solutions
 Procurement Services contract between P-China, as the service provider, and the
P Company and P-HK as the service recipients
 The P Company should consider structuring a Cost Sharing Agreement (CSA)
between itself and P-China and P-HK, as to existing intellectual property and on
future products development costs
 If designed properly, a cost sharing agreement (CSA) arrangement can provide
both income tax and turnover tax advantages in China and in HK
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Copyright © 2012 CRA International
Example: New IP/Product Development/Exploitation Model in China
Example 4 – the P Company
Diagram
P Company
(in Continent E)
sales
Customers in Continent E
Continent E rights,
ex PRC rights and
rest of world
Cost-Sharing
Agreement
Holding
Company
sourcing
services
P-HK
sales
(Hong Kong
Limited Company)
To customers in rest of
the world, excluding
Continent E and PRC
Owns rights to rest of
world, ex Continent E
and PRC rights
P-China
(China WFOE)
sales
PRC customers
PRC rights
Intercompany Agreements and Payments
 Procurement Services Agreement between P-China WFOE and P Co. and P-HK
o P Co. and P-HK to pay service fees to P-China
 Cost Sharing Agreement between P Co., P-China, P-HK
o P-HK to pay P Co buy in payment
 License Agreement between (a) P Co. and P-China and (b) P Co. and P-HK
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Copyright © 2012 CRA International
Contact Information
Notice / Disclaimer
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Contact Information
Peter Guang Chen
(Hong Kong)
Email: pchen@crai.com
Phone: +852 8127.7500 +852.3927.5222 (direct) +852.6587.9097 (mobile)
Joshua Wan
(Hong Kong)
Email: jwan@crai.com
Phone: +852 8127.7500 +852.3927.5333 (direct) +852.5688.1570 (mobile)
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Copyright © 2012 CRA International
Important Notice / Disclaimer
This presentation contains general information only and is based on the experiences and
research of individual professional(s) / practitioner(s) on the China Tax Panel of the TEI Asia
Tax Executives Forum 2012 Singapore. The materials contained here and the comments
made during the life presentation of the China Tax Panel are the opinion(s) of the respective
individual professionals / practitioners of the China Tax Panel (“China Tax Panel Members”),
and do not represent the opinion(s) or position(s) of the companies / firms which the China
Tax Panel Members are employed or affiliated with. Neither the China Tax Panel Members
nor the companies / firms employing (or affiliated with) the China Tax Panel Members are, by
means of this presentation, rendering business, financial, investment, or other professional
advice or services. This presentation is not a substitute for such professional advice or
services, nor should it be used as a basis for any decision or action that may affect your
business. Before making any decision or taking any action that may affect your business, you
should consult a qualified professional advisor. The China Tax Panel Members, and the
companies / firms employing (or affiliated with) the China Tax Panel members, their affiliates,
and related entities shall not be responsible for any loss sustained by any person who relies
on this presentation.
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