We recently had the very good fortune to catch up with Martin Ng, the highly experienced, Shanghai-based Managing Partner of WTS China, to pick his brains about Transfer Pricing and related risks for foreign corporates in China, and also to uncover some of the personal motivations behind his professional role. A section of his interview is also featured in the February edition of our International Corporate Structures Newsletter.
What do you see as the biggest mistake which multinational corporates make in managing transfer pricing risks in China?
The biggest mistake is the lack of a holistic control over the TP risk in China’s circumstances in which tax, foreign exchange and customs administrations are much inter-related. Decisions are often made by overseas headquarters without due consideration to TP impacts to their Chinese subsidiaries. Some even do not have a centric TP policy for guiding the group’s pricing towards their Chinese subsidiaries’ functions and risks. Post-transaction compensations are often abused to beautify the gaps. The situation would simply go from bad to worse, as the compensation would reflect that the Chinese subsidiaries’ value contribution is under-estimated. Sometimes, it may trigger not only tax audit but also jeopardize cross-border fund flow. Companies with complex TP agreements should carefully adjust their TP position against the effects of their business changes.
Which types of supply tend to be most sensitive from a Chinese transfer pricing perspective?
Service and royalty charges have become the spotlight of tax investigation in China. The Chinese tax authorities would assess, from BEPS perspectives, how the service is actually provided, how the royalty is granted, how the Chinese subsidiaries can benefit, how they match with the China entity in terms of functionality, risk level, business cycle, and whether the charges are reasonable, etc. For any cases involving a payment over USD 50,000 in one single remittance, the Chinese entity would need a tax settlement certificate before it can wire any fund to overseas. In other words, if these intercompany charges are not well structured, they can be a major stumbling block to the Chinese operation.
To what extent are tax authorities in China willing to provide clearances in respect of transfer pricing arrangements or methodologies?
In principle, China follows the OECD guidelines, and enacts rather internationalized TP legislations. In practice, TP cases are usually handled by local tax authorities which are less experienced. Clearance in writing or advance rulings for TP issues are a rare practice. Instead, negotiation is a general norm, which may take time and effort to achieve an acceptable result.
What specific requirements apply in China as regards the form or content of intercompany agreements, to support Transfer Pricing compliance?
There is no specific requirement on the agreement formats or content for tax purposes. Despite this, intercompany agreements should be reviewed not only for tax compliance and efficiency, but also for compliance with foreign exchange and customs regulations as well. For example, if royalty payments are accrued on China books over 90 days, online registration of the account payables are required; otherwise, the Chinese entity could be penalized and its ability to remit or receive cross-border funds could be affected. Some royalty fees do carry customs implications as well, which is commonly ignored by operators.
How would you describe the approach of the Chinese tax authorities in bringing transfer pricing challenges? How do you expect this to change over the coming years?
A TP investigation can be time and resources consuming. In the wake of BEPS action plans and the globalization of TP practices, the Chinese tax authorities are well groomed to ask for more global TP data than before in an investigation. They might ask for the master files and country-by-country reports. The more information collected, the more questions asked, the longer the process becomes. It is common that a TP enquiry case can last for a year or longer. Without a proper negotiation strategy, it will be like a boat wandering in the ocean.
Over the coming years, their approach will change from concentrating on methodology to focusing on implementation. TP defense environment is likely to become more aggressive than ever. Investors should be professionally prepared to meet the local TP challenges. It is important to ensure intercompany agreements are correctly implemented. A good methodology may no longer be sufficient if the group cannot ensure a controlled implementation supported by robust systems and procedures.
What advice would you give to multinational corporates when responding to a tax investigation or challenge in China?
When responding to a tax investigation, corporates are advised to:
- Engage the headquarter at an early stage, even though the issue appears to be local;
- Consider not only tax implications, but also China foreign exchange and customs risks;
- Avoid any rash actions or submission, before a proper diagnosis is done; and
- Involve internal or external tax professionals in the talks with the tax authorities.
How did you get into tax and transfer pricing?
I started my consulting career with Coopers & Lybrand Hong Kong in 1994. It was the time that the tax practice was being built to cope with the booming foreign investments into China, and thus naturally we all became part of the tide then. It was also the time that the Big 8 accounting firms in Hong Kong were starting to embark on the Chinese market, in the wake of China’s open-door policy pioneered by the president then, Mr. Deng Xiaoping. I was inspired to perk up my tax career by seeking any opportunity to work in China. I then applied for relocation from Hong Kong to Shanghai in 1999 (at PwC then), without realising that it was a journey without turning back.
Who has been the most influential role model for your professional life?
He is not somebody but a Japanese chef in a medium-sized restaurant in Shibuya of Japan where I interned as a co-chef in 1989. It is no exaggeration to claim that his kitchen management style helped me define an early concept of “team working” and equipped me with the basic soft skill that I still find useful nowadays. The restaurant was right in front of one of the busiest train stations in Japan, and earned a soaring popularity among the non-stop commuters. Its kitchen was run in three shifts a day, with each shift of ten staff. They had their unique way of churning things out at a tongue-tied speed. For example, they always paired two guys together to serve a simple task. The twin could in one accord produce three banana splits in six seconds. In every six hours, the whole team was replaced by another shift of staff - noodles were still in the pan and soups were still boiling. Without any computer or message board, I see no sign of any interruption. It was a show of concentration, artful skills and sincere respect to the job. Tax practice is no exception an operation of team working and processes. It requires the similar techniques in leadership and process management.
In a movie of your life story, which actor would you like to play you?
It could be someone who has gone through wartime and a roller-coaster life style and still has a reason for hope. Someone like the Cambodian-turned US actor, Haing S. Ngor, who I believe can play my life better than anyone else. He played a Cambodian refugee in The Killing Fields. The film is a 1984 British biographical drama film about the Khmer Rouge regime in Cambodia. It was a success at the box office and Ngor won the Best Supporting Actor. In 1999, the film was voted by the British Film Institute the 100th greatest British film of the 20th century. I do admire his toughness and the peace of mind he still had after all the turbulent years.
What would be your dream job if you didn’t work in tax?
My dream job would be a boxer, if I were 30 years younger. I have received Thai kickboxing training in my childhood but never had a chance of using the skill. The hobby still sticks with me and it keeps me fit for the strenuous tax work. There is nothing truer than knocking out opponents or being knocked out. That actuality and brutality keeps reminding me the necessity of non-stop practising and combating in order to stand upright on the stage of competition.
What is your biggest extravagance?’
It happened in my childhood. I had lost a hand-carried bag fully loaded with 12 palm-sized silver bars during an adventurous trip in Thailand. It was all of our family’s fortune at that time. We could not afford the pain in figuring out how much the loss was worth. My rough guess is that they were good to buy a large villa nowadays. It keeps reminding me that I need to work hard to earn back the villa. So far, I might still need another 11 bars to make up the loss.
What do you do to relax?
It is a mix of exercising and resting. If I am not messing around with my two young kids at home, in playgrounds or toyshops, I might run 10 km every other day at dawn. I need to practise my running skill constantly to meet the routine of running three to five marathons a year. The next race is coming in March this year in Suzhou, a 2,500-year-old city to the west of Shanghai, more well-known as a backyard garden of Shanghai and ironically also where the Singapore Industrial Park is located. Running and sight-seeing in different places in China is becoming a yearly habit to me now. China as a whole holds about 300 marathons a year in different places. This number is good enough for me to keep my habit.
What is your favourite holiday destination?
I fancy visiting places with memory, culture and history which can resonate. I am already over the age of visiting as many new places and tasting an many recipes as possible. Cardiff in the UK, Taipei in Taiwan, and Lille in France are places where I ever spent my school days. Re-visiting them with my wife and kids will be wonderful. University campus, castles, libraries, museums, beaches, galleries and of course fish and chips. They are the must.
What piece of advice would you give your 18-year-old self?
Read more Chinese literature and history. It has been way too long for me to truly appreciate the wisdom and value of Chinese philosophy. Our generation was taught to learn imported knowledge and foreign history, but has ignored our own literature that ages a few thousand years. I read in the press recently that a Tube station in London has been posting daily for 14 years on its information board a Thought of the Day. Many of the verses were from the Chinese book of Lao Zi, called Tao Te Ching written 2,500 years ago, like “A journey of a thousand miles begins with a single step”. These aphorisms have won fans from not only Tube passengers at Oval Station but also around the world in twitters. Being a Chinese, it would be a shame if we cannot benefit first-hand from our own treasure.
Martin Ng can be contacted by email at email@example.com or by telephone on +86 21 50478665.
Get practical advice & insights on the Legal Implementation of Transfer Pricing for Multinational Groups