Intellectual Property-related Tax Avoidance Arrangements: China’s New Transfer Pricing Rules & Implications for Technology-related companies operating in China

George Yijun Tian

Abstract


Cross-border Tax Avoidance is not a new concept. It affects every country, particularly developing countries. The United Nations Conference on Trade and Development (UNCTAD)’s World Investment Report 2015 indicates that the amount of corporate profits shifted from developing countries is about $450 billion USD,[1] and found that tax avoidance practices result in a significant leakage of development financing resources and an estimated $100 billion USD tax revenue loss per year for developing countries.[2] China, as one of the largest developing countries, also suffers a lot from tax avoidance practices by multi-national enterprises (MNEs). Chinese state media estimates that tax evasion and avoidance by foreign companies costs the world's second largest economy at least 30 billion Yuan ($4.8 billion USD) in tax revenues each year. [3]  

 

In recent years, particularly after G20 conference in Australia in 2013, China has taken transnational tax avoidance issue seriously. In November 2014 China levied about $140 million in back taxes from Microsoft Corp in the first major case concerning cross-border tax evasion in the country.[4]Furthermore, the Chinese government has increased tax scrutiny of foreign companies by the implementation of new rules designed to rein in cross-border tax avoidance, particularly transfer pricing arrangements.

 

This article examines the major forms of intellectual property (IP) related tax avoidance activities conducted by major technology-related MNEs, in particular, China’s new anti-tax avoidance rules and policies (such as particular transfer pricing regulations). These include the Public Notice Regarding Refining the Reporting of Related-Party Transactions and Administration of Transfer Pricing Documentation (SAT Public Notice [2016] No. 42) (“Public Notice 42”) issued by the State Administration of Taxation (“SAT”) of China, and the SAT’s submission to the United Nations Practical Manual on Transfer Pricing for Developing Countries (the Manual) in December 2016.This article explores the implications of these new rules and policies to IP related transactions. It also attempts to provide some practical suggestions for technology-related MNEs operating in China.

 


[1] UNCTAD, World Investment Report 2015 – Reforming International Investment Governance, at 200 http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf

[2] Ibid.

[3] Michael Martina, Firms prepare for new tax rules as China vows crackdown (Reuters Market News, Jan 31, 2015) at http://www.reuters.com/article/china-taxavoidance-idUSL4N0V91IR20150201

[4] Ibid.


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