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Transfer Pricing in China – Why a holistic approach is key

Intercompany Agreements

26 February 2018

This article appears in the February edition of our International Corporate Structures Newsletter.

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.

The extract below is a small part of the interview he kindly gave. We highly recommend reading the full interview on our blog here.

LCN: What do you see as the biggest mistake which multinational corporates make in managing transfer pricing risks in China?

MN: 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.

LCN: Which types of supply tend to be most sensitive from a Chinese transfer pricing perspective?

MN: 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 funds overseas. In other words, if these intercompany charges are not well structured, they can be a major stumbling block to the Chinese operation.

LCN: Who has been the most influential role model for your professional life?

MN: 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.

Martin Ng can be contacted by email at martin.ng@wts.cn or by telephone on +86 21 50478665.

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Article by
Paul Sutton
LCN Legal Co-Founder

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