Recently, China Taxation News reported that the Chengdu State Tax Bureau made a transfer pricing adjustment to: (i) deny a tax deduction of approximately RMB100 million (US$16.2 million) claimed for trademark royalty payments; and (ii) collect RMB23 million in enterprise income tax from a foreign invested enterprise (FIE) engaging in the sale of luxury goods.
During the review of the FIE’s tax clearance certificate (TCC) application in early 2013, the tax bureau discovered that the FIE paid significant royalties to a related party, a company incorporated in the British Virgin Islands (the licensor). As background, before 1 September 2013, a TCC issued by the tax authorities was a precondition to remittance. Effective from 1 September 2013, the requirement to obtain a TCC was abolished.
The tax bureau was sceptical of the arrangement because it shifted profits from the FIE in China to the licensor in BVI, a well-known tax haven, while simultaneously enabling the FIE in China to avoid Chinese taxation. Consequently, the tax bureau conducted a transfer pricing audit on the FIE.
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Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mailing Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com
