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Tizhong cautioned that while identifying andquantifying potential cost savings ( e.g., lower labor,capital, technology) generated by LSAs is relativelystraightforward, it is more difficult to quantifythe "market premium" ( i.e ., qualities such asmarket size and government incentives that couldmake a particular location more profitable) thatcertain LSAs may generate. Tizhong recommendedeconomic modeling as a first step, with econometricanalysis and game theory as other potentialavenues to explore when attempting to determinea market premium generated by LSAs.In addition to the challenges and importance ofrecognizing and measuring LSAs, Tizhong also addressedseveral other transfer pricing matters thatare at the forefront of the SAT's focus:Lack of Comparables – As with most developingcountries, China has a limited number of publiccompanies. This is due to a manufacturing-basedeconomy, a decreasing number of third-partyarm's length transactions, the level of integrationof a Chinese operation into the multinationalparent company, and other factors. The SAT addressesthe lack of comparables by making transferpricing adjustments to foreign comparables thattake into account differences in geographic factorswhen using the transactional net margin method.Alternatively, the use of the CUP and profit-splitmethods can alleviate this issue; unfortunately,these methods are not always available.Transfer Pricing Examinations – In China, transferpricing cases are subjected to three levels ofpanel reviews: (i) city (prefecture) level, (ii) provinciallevel, and (iii) the SAT. The city reviewaddresses whether the case should be selectedfor additional review or closed. The provinciallevel then conducts the second level of review,and the SAT conducts the final review and hasthe ability to overturn decisions made by lowerlevelexpert panels (however, this is rare). Thethree-level review is designed to promote fairnessto both the taxpayer and the tax authority,something that is not always possible to achievethrough the courts as they rely upon the SATfor guidance in transfer pricing matters.Transfer Pricing Audit Targets – China currentlyfocuses on MNEs that fit any of the followingfact patterns: (i) frequent related party transactions,(ii) abnormal losses or gains, (iii) regularlosses that are not corrected by the business, (iv)failure to report sufficient documentation, or (v)adoption of "unreasonable" pricing policies.It is evident from Mr. Tizhong's comments thatthe SAT will continue to focus on transfer pricingmatters and is busily filling in the gaps interms of its approach to common issues such ascomparables, adjustments, and audit practices.MNEs located or operating in China should bevigilant in setting up and documenting their operationsin a way that minimizes exposure. Inaddition, whether operating in China or otherdeveloping countries, MNEs should evaluatethe existence of potential LSAs that could impactintercompany pricing.30
OECD Section E – Redraft On Safe HarborsRevised Section E On Safe Harbors InChapter IV Of The Transfer PricingGuidelines For Multinational EnterprisesAnd Tax Administrationsby Matthew Vold (Chicago)Revised Section E on Safe Harbors in Chapter IVof the Transfer Pricing Guidelines for MultinationalEnterprises and Tax Administrations, approved bythe OECD Council on May 16, 2013, encourages,under the right circumstances, the use of bilateralor multilateral safe harbors. The discussion considersthe benefits of, and concerns regarding, safeharbor provisions and provides guidance regardingthe circumstances in which safe harbors may be appliedin a transfer pricing system based on the arm'slength principle.Key areas of discussion include:Benefits of safe harbors – Safe harbors providebenefits to taxpayers through simplified complianceand reduced compliance costs and certaintythat the price charged or paid on the coveredcontrolled transaction will be accepted by the taxadministrations. They also permit tax administrationsto focus administrative resources fromsmaller taxpayers and less complex transactionsto more complex, higher-risk cases.Concerns over safe harbors – Adverse consequencesof safe harbors may include reporting oftaxable income that is not in accordance with thearm's length principle, the risk of double taxationor double non-taxation when adopted unilaterally,the potential for inappropriate tax planning,and issues of equity and uniformity.Recommendations on the use of safe harbors– The OECD developed guidance encourages,under the right circumstances, the use of bilateralor multilateral safe harbors, but notes thatwhether adopted on a unilateral or bilateral basis,safe harbors do not bind or limit in any way anytax administration other than the tax administrationthat has expressly adopted the safe harbor.The OECD's recommendations on the use of safeharbors include the following:Unilateral safe harbors may lead to thepotential for double taxation or double nontaxation,among other issues. For example,when a taxpayer reports income above thearm's length level due to the safe harbor,more income will be reported by the domesticaffiliate and less taxable income will bereported in the foreign tax jurisdiction of thecounterparty to the transaction. In the eventthe other tax administration challenges theprice of the transaction, the taxpayer may facedouble taxation. On the other hand, doublenon-taxation could occur when the taxpayerelects application of a unilateral safe harborbelow the arm's length level in the countryadopting the safe harbor. In such a case, therewould be no assurance that the taxpayer wouldreport income above the arm's length level inother countries on a consistent basis, and it isunlikely other administrations could requirethe income to be reported above arm's length31
Page 1 and 2: GLOBAL TAX WEEKLYa closer lookISSUE
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Page 79 and 80: Key speakers: John Capasso (Alvarez
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Key speakers: TBA6/27/2013 - 6/27/2
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6/14/2013 - 6/14/2013http://www.con
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THE CYPRUS BAIL-OUT ANDFOREIGN CLIE
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Chair: Jonathan Levy (Partner, Reyn
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IN THE COURTSISSUE 30 | JUNE 6, 201
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on including the profit from the do
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deduct VAT as a result of incomplet
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where the taxpayer had somehow offs
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een paid in the destination State.
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