In a recent letter to the United Nations' tax committee, China's State Administration of Taxation (SAT) made clear its position on service fees: Chinese officials need to be able to verify that the fees charged to subsidiaries from foreign parents are reasonable. The letter asked the UN Committee of Experts on International Cooperation in Tax Matters, which is preparing a practical manual on transfer pricing, to require transparency from multinationals when those fees are charged. Companies, the SAT said, must disclose the transfer pricing method used to calculate related-party service fees as well as the amount of those fees.
The letter also described several situations where service fees should not be charged to subsidiaries:
Service fees are a hot-button issue in China, along with location savings. At a 2013 transfer pricing conference in Paris, Liao Tizhong, the SAT's deputy director general of international taxation, spoke in depth about the position of Chinese officials on that issue. As stated in China's chapter of the UN transfer pricing manual, companies in developing countries may be entitled to extra profit that stems from the advantage of operating in a cheaper location. Liao outlined the four-step approach SAT officials take in determining a taxpayer's "location specific advantages" for transfer pricing purposes, with LSAs including both a "costs savings" and "market premium" component. (See the prior blog post on Liao's comments.)
Liao also will address the June 4&5 North American Transfer Pricing Conference in Washington, D.C. Readers are invited to register by May 5 to take advantage of the early bird rate.
To read the full story on the SAT's letter, sign up for a free trial of Transfer Pricing Report.
Molly Moses, Managing Editor, Transfer Pricing Report.
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