Today, Shanghai; Next Up, Toronto

Bloomberg BNA’s first transfer pricing conference in Asia—the latest offering in our Global Transfer Pricing Conference series with Baker & McKenzie—could not have been better timed. The day the conference opened, Sept. 17, China issued a revised draft circular on transfer pricing that completely changed the game for multinational companies operating in the country. Bloomberg BNA was there to capture the earliest possible comments on the guidance from government and private sector experts.

China’s top international tax official, Liao Tizhong, set the stage with his opening keynote, where he made the case for changing a global tax system that Chinese officials believe favors rich countries. Current international tax rules, he said, place too much emphasis on contributions like intellectual property, which tend to come from wealthier countries, and not enough emphasis on characteristics like a country’s ability to produce products cheaply.

Other conference sessions took an in-depth look at the circular, which implements many aspects of the OECD’s ambitious project to combat base erosion and profit shifting (BEPS). Stig Sollund—coordinator of the United Nations tax committee's transfer pricing subgroup—noted that China and India's involvement in the BEPS project “have brought new ideas and perspectives into the discussions that may be challenging orthodox interpretation of international rules.” Specifically, the new circular introduces a new transfer pricing method that allocates the combined profits among related parties by analyzing how much they contribute to value creation. Importantly, Glenn DeSouza of Baker & McKenzie in Shanghai said, this means that traditional transfer pricing methods that rely on an analysis of comparable transactions will no longer be acceptable—and that China is likely to wind up with a bigger slice of global tax dollars as a result.

A huge issue going forward will be how to bridge the gap between China’s new approach and the U.S. approach, which favors the traditional, comparables-based analysis. In remarks that were startlingly prescient given that they were recorded in advance of the event, Robert Stack, U.S. deputy assistant Treasury secretary for international tax affairs, offered a way forward in U.S.-China tax disputes, which usually involve a U.S. multinational and a Chinese subsidiary: focusing on the functions, assets and risks in the jurisdiction. Under this approach, he said, in some cases the transfer pricing analysis will lead to a “routine” return—that is, relatively little income—for the Chinese entity, and in other cases it will lead to different kinds of returns.

There is no doubt among those in the international tax world that the BEPS project will lead to a huge increase in double-tax disputes. Other sessions discussed the varying levels of effort—and ability—among Asian countries to cope with the influx. Japan and South Korea are seen to have smoother processes in place than, for example, Indonesia and Vietnam.

Meanwhile, an Australian tax official answered the criticism leveled at the country for its recent moves to combat multinationals’ tax avoidance—some of which were perceived as going beyond the parameters of recommendations coming out of the BEPS project. Mark Konza, deputy commissioner international of the Australian Taxation Office, described the country’s approach—which doubles the penalties for companies in some instances, as “very moderate” and harking back to traditional tax laws that require tax to be paid “in the place where the economic activity is taking place.” 

The conversation will continue with the Bloomberg BNA and Baker & McKenzie Global Transfer Pricing Conference in Toronto October 14-16.   Just as people attending the Shanghai event heard the first discussion of China’s new circular, those at the Toronto conferences will hear some of the earliest in-depth analysis of the OECD’s final BEPS guidance, to be issued Oct. 5, by experts from the OECD, the U.S. government and the private sector.  

For more information and the full agenda for the Toronto Transfer Pricing Conference click here.

by Molly Moses