Royalty arrangements are a common way to remunerate intangibles. The corporate tax and transfer pricing aspects are usually of paramount importance when implementing such agreements in China. Experience shows that tax controversy can also arise from the Chinese Customs when the latter considers that a royalty payment is deemed to be part of the imported price subject to customs duties and import value added tax (VAT). This story mainly focuses on the customs aspects of the tax controversy.
The Customs often scrutinises or challenges multinational companies’ intra-group royalty arrangements in view of collecting more tax revenues from an anti-abuse angle. There are many ways to manage a tax controversy in the context of the Customs, including facilitating more effective and efficient communications among various tax and customs officials to mitigate or avoid double taxation; bridging the gap between the Customs and multinational companies when interpreting different tax and customs regulations; determining the nature and purpose of a royalty payment and the portion to be added to the value of the goods transaction. We met with Susan Ju, PwC China Worldtrade Management Services Partner and Feng Yang, PwC China Transfer Pricing Senior Manager, to discuss these challenges through sharing their experiences on a real-life tax controversy case.