Jun 2010
The China State Administration of Taxation (the "SAT") has recently announced their 2010 work plan. A key item on their agenda includes national training on the automotive industry. This will be held in early July 2010 for specialised transfer pricing tax auditors. In addition to previous anti-avoidance focus areas such as pharmaceutical, notebook computers and footwear industries, this scheduled training demonstrates a clear intent by the SAT that going forward the automotive industry will come under much greater scrutiny.
The SAT has developed substantial knowledge and experience in relation to the automotive industry through the completion of bilateral advance pricing arrangements and mutual agreement procedure cases in the past few years. External experts from the OECD, Chinese industry organisations, transfer pricing practitioners such as PricewaterhouseCoopers, as well as major taxpayers from the automotive industry, will be invited to share their experience and views. The SAT will utilize this training to sharpen local tax officials' technical skills and to boost the confidence of local tax officials when dealing with transfer pricing issues in this industry.
It is anticipated that the following topics will be discussed and explored during the upcoming training:
- The global operations and value chain of automotive multinationals;
- Functions and risks borne and contributions made by Chinese subsidiaries as part of the global supply chain;
- International transfer pricing practices of the industry; and
- Other unique attributes of the automotive industry in China, for example, whether any local intellectual property (IP) has been created by Chinese subsidiaries.
With respect to this last point, we have noticed that the SAT has been advocating the economic attributes of China through discussions and actual cases. These attributes include market premium, location savings and the China government's specific industry stimulus policies. Therefore, we also expect these factors to be explored.
PwC recommendations
Over the past few years, the SAT has established an "industry focused" transfer pricing audit practice. In doing so, the SAT has ensured that major transfer pricing issues for particular industries are identified in a timely manner and resolved consistently across the country. We recommend taxpayers in the automotive industry, as well as the other industries listed above, take immediate action to revisit their transfer pricing policies. Documentation to support the taxpayer's transfer pricing position will be a key defence element at the inquiry stage. In particular, documentation should cover the nature of the local functions and whether there is any IP generated by these functions in China. Taxpayers should also be prepared to discuss and explain, in detail, their Chinese business models and transfer pricing policies with the China tax authorities.
