China Tax/Business News Flash 

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Please click on the links below to view more:   A Multinational Group Successfully Concluded China's First Case of Multi-Jurisdiction Advance Pricing Arrangements    On 29 December 2005, a multinational group's four companies signed four advance pricing arrangements ("APAs") in Xiamen with their respective in charge State Tax Bureaus from Xiamen, Zhangzhou and Shanghai.  This is the first time when multiple companies within a same group successfully concluded APAs simultaneously with their respective in charge tax bureaus in different cities.  For multinational groups interested in seeking APAs to address their transfer pricing needs, the case brings some welcoming news.   Read more...... Expand / Collapse Under the current APA regulations, affiliated companies within the same multinational group must apply for APAs separately with their respective in charge tax bureaus.  There are concerns that APA applications submitted to different tax bureaus may be processed differently and result in different outcome, even if they are for companies in the same group, the covered transactions are with a common related party, and the APA period and the proposed transfer pricing method are all the same.  While these are valid concerns, the success of this case illustrates that multi-jurisdiction APAs can be processed consistently in a coordinated manner, particularly with active involvement or under supervision of the State Administration of Taxation ("SAT"), as in this case.  Through cooperation between the taxpayers and the tax authorities and among themselves, the APA process can be efficient and cost effective for both the taxpayers and the tax authorities.    The types of transactions covered by the APAs also are worth noting.  The covered transactions in this case include royalties and service charges rather than transfer prices for tangible property, which had been the primary subject of many other APAs.  The success of this case highlights the potential and the tax authority's readiness for the APA program to address more complicated transfer pricing issues.    Under the current APA rules, the SAT will be actively involved in certain APA cases, such as those involving multiple tax jurisdictions as in this case.  Without a centralized APA office within the tax administration to handle such cases, group companies under different tax jurisdictions still face the obstacle of having to deal with different local tax bureaus when applying for APAs.  However, the success of this case exemplifies that, with the active involvement of the SAT and close coordination among the tax authorities, the obstacle for such cases can be overcome.   Close Shanghai Waigaoqiao Free Trade Zone Offers New Incentives Under the "11th Five-Year Plan"    To further enhance the development of the Shanghai Waigaoqiao Free Trade Zone ("WGQ"), the WGQ local government has released its own incentive policy for the period of "11th Five-Year Plan" (i.e. from 1 January 2006 to 31 December 2010) under Hu Wai Guan Wei [2006] 2.    Read more...... Expand / Collapse The following table summarizes the key possible incentives/financial subsidies available to newly established and existing entities of different industries under the new incentive policy:    Industrial Sector Possible Local Financial Subsidies Newly Established Entity Existing Entity Trading A financial subsidy equivalent to 100% of the local portion of the added value amount and profits collected from the entity for the first 2 years and 50% for the remaining years during the "11th Five-Year Plan" period. A financial subsidy equivalent to 50% of the local portion of the added value amount and profits collected from the entity for the years during the "11th Five-Year Plan" period. Distribution - Operating Centre A financial subsidy equivalent to 100% of the local portion of the added value amount and profits collected from the entity for the first 3 years and 50% for the remaining years during the "11th Five-Year Plan" period.   A financial subsidy equivalent to 50% of the local portion of business income collected from the entity.   A financial subsidy equivalent to 100% of the local portion of collected personal income of senior executives of the entity for the first 3 years and 50% for the remaining years during the "11th Five-Year Plan" period. A financial subsidy equivalent to 100% of the incremental local portion of the added value amount and profits collected from the entity for the first 3 years and 50% for the remaining years during the "11th Five-Year Plan" period.   A financial subsidy equivalent to 50% of the local portion of the added value amount and profits collected from the entity in the preceding year.   A financial subsidy equivalent to 50% of the local portion of business income collected from the entity.   A financial subsidy equivalent to 100% of the local portion of collected personal income of senior executives of the entity for the first 3 years and 50% for the remaining years during the "11th Five-Year Plan" period. Processing Trade A financial subsidy equivalent to 100% of the local portion of the added value amount collected from the entity for the first 2 years.   A financial subsidy equivalent to 100% of the local portion of profits collected from the entity for the first 2 years and 50% for the remaining years during the "11th Five-Year Plan" period. For an entity established during the "10th Five-Year Plan" period, it could enjoy a financial subsidy equivalent to 50% of the local portion of profits collected from the entity until the expiration of the incentive period if it has not completely enjoyed the benefit in the "10th Five-Year Plan" period. Warehousing and Logistics A financial subsidy equivalent to 100% of the local portion of business income and profits collected from the entity for the first year and 50% for the subsequent 2 years. For an entity with an additional injection of registered capital of US$1M or above, it can enjoy a financial subsidy equivalent to 50% of the local portion of business income and profits collected from the entity.   For an existing entity, it can enjoy a financial subsidy equivalent to 50% of the local portion of business income and profits collected from the entity for 3 years. Exhibition For an entity organizing short term exhibition in WGQ, it could enjoy a financial subsidy equivalent to 100% of the local portion of business income collected from the entity.   For an entity participating in an exhibition, it could enjoy a financial subsidy equivalent to 50% of the local portion of the added value amount collected from the entity.   For an entity organizing exhibition in WGQ on a long term basis, it could enjoy a financial subsidy equivalent to 100% of the local portion of business income collected from the entity for the first 3 years and 50% for the remaining years during the "11th Five-Year Plan" period.  Meanwhile, incentives available to the trading sector would also be applicable. However, the circular has not laid down the definitions of "long term" and "short term". Animated Films and Related Services A financial subsidy equivalent to 100% of the local portion of the added value amount, business income and profits collected from the entity for the first 3 years and 50% for the remaining years during the "11th Five-Year Plan" period. No specific incentive provided under in Hu Wai Guan Wei [2006] 2. Functional Market A financial subsidy equivalent to 100% of the local portion of the added value amount, business income and profits collected from the entity for the first 2 years and 50% for the remaining years during the "11th Five-Year Plan" period. No specific incentive provided under Hu Wai Guan Wei [2006] 2. Equipment Leasing For an entity with a registered capital of US$10M or above, it could enjoy a financial subsidy equivalent to 100% of the local portion of business income and profits collected from the entity for 3 years. Key Hi-tech Enterprises, Software Enterprises, R&D Centres, Animated Films and Related Services Enterprises For a qualified entity, it could enjoy the incentives with reference to the policy of the Zhang Jiang Hi-tech Zone upon approval. International Trading, Logistics and Advanced Manufacturing Enterprises A special financial subsidy could be granted on a case by case basis. Key Enterprises and Projects under "Qu Zhen Lian Dong" Upon approval, these entities and projects could enjoy the incentives with reference to the policy in the WGQ.    In addition, it is worth to note that the incentive policy clearly provides that an entity shall not enjoy overlap financial and tax incentives.  The specific application procedures and clarification of certain definitions are still pending the issuance of the detailed implementation rules from the WGQ Administration Committee.    Although the aforesaid incentive policy is not under the administration of the tax authorities, it may reduce the effective tax costs of qualified entities in WGQ.  Investors may want to re-evaluate their overall investment costs in WGQ in light of the above provisions.   Close

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