Chapter 1: Introduction
by Margaret Kent, Robert Feinschreiber
Asia-Pacific Transfer Pricing Handbook
- Cover
- Contents
- Title
- Copyright
- Dedication
- Preface
- Part One: Country-By-Country Analysis
- Chapter 1: Introduction
- Chapter 2: Australia’s Risk Assessment Transfer Pricing Approach
- Introductory Issues
- Transfer Pricing Reviews
- Documentation Requirements
- Preparation of the Documentation File
- Applying the Arm’s Length Principle
- Simplified Approach to Doing a Benchmarking Study
- Four Steps for Testing International Transfer Prices
- Decision Tree
- How the ATO Scores Risk
- Scoring the Three Levels
- Score Graph
- Outcome of Transfer Pricing Review or Audit
- Audits Taking Place in Low-Risk Situations
- Transfer Pricing Review Process
- Categorizing the Results of the Transfer Pricing Review
- How the Australian Transfer Pricing Audit Procedure Works
- Australia’s Four-Step Process for Businesses
- Chapter 3: Profit Attribution for a Dependent Agent’s Permanent Establishment in Australia
- Permanent Establishment Concepts in Australia
- Profit Attribution Concepts in Australia
- The ATO’s Operational Approach
- Determining Functional Analysis for a Permanent Establishment
- Comparative Analysis for the Permanent Establishment
- Application of the Resale Price Method
- Application of the Cost Plus Method
- Using a Transactional Net Margin Method
- Using a Profit Split Method
- Toll Manufacturers
- Four Examples
- Chapter 4: Australia’s Advance Pricing Arrangement Program
- Chapter 5: China Implements Transfer Pricing Procedures
- Overview
- Regulations
- Chapter 1: General Principles
- Chapter 2: Reporting and Filing of Related Party Transactions
- Chapter 3: Administration of Contemporaneous Documentation
- Chapter 4: Transfer Pricing Methods
- Chapter 5: Transfer Pricing Audits and Adjustments
- Chapter 6: Administrative Guidance Concerning Advance Pricing Arrangements
- Chapter 7: Administrative Guidance Concerning Cost Sharing Agreements
- Chapter 8: Administrative Guidelines Concerning Controlled Foreign Corporations
- Chapter 9: Administrative Guidance Concerning Thin Capitalization
- Chapter 10: Administrative Guidance Concerning General Anti-Avoidance
- Chapter 11: Corresponding Adjustments and International Negotiations
- Chapter 12: Legal Responsibility
- Chapter 13: Supplementary Provisions
- Chapter 6: Reporting Related Party Transactions in China
- Chapter 7: Hong Kong Advance Ruling Cases: Taxability of Profits
- Advance Ruling Process
- Advance Ruling Case No. 4
- Advance Ruling Case No. 8
- Advance Ruling Case No. 9
- Advance Ruling Case No. 10
- Advance Ruling Case No. 11
- Advance Ruling Case No. 12
- Advance Ruling Case No. 13
- Advance Ruling Case No. 16
- Advance Ruling Case No. 19
- Advance Ruling Case No. 21
- Advance Ruling Case No. 23
- Advance Ruling Case No. 26
- Advance Ruling Case No. 30
- Advance Ruling Case No. 34
- Advance Ruling Case No. 35
- Advance Ruling Case No. 36
- Advance Ruling Case No. 37
- Chapter 8: Hong Kong Transfer Pricing Guidelines
- Double Tax Agreements
- Arm’s Length Principle
- Associated Enterprises
- Appropriate Adjustments
- Inland Revenue Ordinance and Case Law
- Permanent Establishment Considerations
- Applying the Arm’s Length Principle
- Four Steps
- Functional Analysis
- Comparability Analysis
- Determining Comparability
- Functions, Assets, and Risks
- Contract Terms
- Economic and Marketing Circumstances
- Business Strategies
- Global Price Lists
- Establishing the Reliability of the Data
- Transfer Pricing Methodologies
- Sources of Profits and Income
- Abusive Tax Schemes
- Transfer Pricing Schemes
- Transfer Pricing Documentation
- Intragroup Services Arrangements
- Deduction of Expenditures Paid for Intragroup Service
- Determining the Amount of Intragroup Charges
- Services Provided by a Permanent Establishment
- Chapter 9: Hong Kong Challenges Abusive Tax Schemes
- Macroeconomic Issues
- Abusive Tax Schemes
- Transfer Pricing Schemes
- Lack of “Economically Significant Functions”
- How the Hong Kong Government Combats Abusive Tax Schemes
- Extreme Forms of Tax Abuse
- Distinguishing Tax Avoidance from Tax Evasion
- How the Reinvoicing Structure Operates
- Shifting Intangible Property: The Tax Perspective
- Chapter 10: Winning Hong Kong’s Landmark Transfer Pricing Case
- Ngai Lik Litigation
- Hong Kong’s Advance Ruling Determinations
- Hong Kong Issues Transfer Pricing Guidelines
- Statutory Provisions
- Determination by the Court of Final Appeal
- The Commissioner’s Determination
- Determination by the Board of Review
- Determination by the Court of First Instance
- Determination by the Court of Appeal
- The Case before the Court of Final Appeal
- Deficiencies in the Scheme as to Additional Annual Bulk Discounts Received by Din Wai Electronics Limited
- Deficiencies in the Scheme as to Manufacturing Profits
- Deficiencies in the Scheme as to the Relevant Years of Assessment
- Are the Scheme and the Tax Benefit Still Viable Bases for Section 61A Assessments?
- Is There a “Tax Benefit” within the Meaning of Section 61A?
- The Narrower Scheme and the Narrower Tax Benefit
- Dominant Purpose of the Narrower Scheme
- Board of Review’s Approach
- Ribeiro’s Dominant Purpose of the Narrower Scheme
- Commissioner’s Assessment Power
- Commissioner’s Exercise of the Section 61A(2) Power
- Board’s Approach to the Exercise of the Section 61A(2) Power
- Disposal of the Appeal
- Chapter 11: Transfer Pricing Litigation in India
- Chapter 12: PE Issues Impact Indian Transfer Pricing
- Background
- Nexus, Effectively Connected Status, and Permanent Establishment
- Four Fact-Based Permanent Establishment Inquiries
- Impact of the Morgan Stanley Case
- Permanent Establishment Transfer Pricing Litigation in India
- Galileo
- Hotel Scopevista
- WorleyParsons
- KnoWerx Education
- ICICI Bank
- Zimmer AG
- Intergrafica
- Ranbaxy Laboratories
- Development Consultants
- Perfitti
- Data Software Research
- SNC Lavalin /Acres Inc.
- Airport Authority of India
- Radha Rani Holdings
- Mashreq Bank PSC
- Mentor Graphics (Noida) Pvt. Ltd.
- Millennium Infocom Technologies Ltd.
- Van Oord ACZ India
- Tokyo Marine & Fire Insurance Co. Ltd.
- Western Union Money Transfer
- Cargo Communities Network
- Hyundai Heavy Industries
- E. Gain Pvt. Ltd.
- Infosys International Activities in New York State
- Chapter 13: Taxation of Travel Services in India
- Chapter 14: Transfer Pricing in Indonesia
- Chapter 15: Japan’s Directive on Transfer Pricing Operations
- Background
- Regulations and the Examples—How They Differ
- Operation of the Japanese Transfer Pricing Administrative Guidelines
- Chapter 1: Definitions and Basic Policies
- Chapter 2: Examination
- Chapter 3: Points to Note in Calculating Arm’s Length Prices
- Chapter 4: Treatment of Foreign Transferred Income
- Chapter 5: Advance Pricing Arrangements
- Chapter 16: Selecting the Arm’s Length Price in Japan
- Background
- Demonstrating the Selection of Arm’s Length Price
- Selection of the Method of Calculation of Arm’s Length Price
- Case 1: Use of the Comparable Uncontrolled Price Method
- Case 2: Use of the Resale Price Method
- Case 3: Use of the Cost Plus Method
- Case 4: Methods Consistent with the Comparable Uncontrolled Price Method
- Case 5: Methods Consistent with the Cost Plus Method
- Case 6: Transactional Net Margin Method
- Case 7: Contribution Profit Split Method
- Case 8: Residual Profit Split Method
- Case 9: Adjustment for Differences
- Chapter 17: Applying Japanese Intangible Transfer Pricing Methods
- Case 10: Intangibles Created by R&D and Marketing Activities
- Case 11: Distribution Channels and Quality Control Know-How
- Case 12: Know-How Accumulation through Human Resource Business Activities
- Case 13: Contributions to Create, Maintain, and Develop Intangible Properties
- Case 14: A Company Bearing only the Cost of Creation of the Intangible Properties
- Case 15: Intangible Properties for Employees on Loan
- Chapter 18: Japanese Profit Split Transfer Pricing Methods
- Case 16: Applying the Profit Split Method to a Series of Foreign-Related Transactions
- Case 17: Excluding Transactions from the Profit Split Method
- Case 18: Calculation of the Profit to Be Split
- Case 19: Differences in Labor Costs Impact the Residual Profit Split Method
- Case 20: Treatment of Market Fluctuations
- Case 21: Calculation of Basic Profit
- Case 22: Factors for Splitting the Residual Profit
- Chapter 19: Japanese Guidelines Address Diverse Transfer Pricing Issues
- Chapter 20: Malaysia Advance Ruling Guidelines
- General Facets of the Advance Ruling Procedure in Malaysia
- Binding Nature of an Advance Ruling
- Scope of the Advance Ruling Request
- Circumstances in Which Malaysia Tax Authorities Will Not Issue an Advance Ruling
- Circumstances in Which the DGIR Can Decline to Issue an Advance Ruling
- Notice Requirements
- Advance Ruling Application Procedure
- Advance Ruling Application Form
- Information Request Requirement
- Issuance of the Advance Ruling
- Advance Ruling Finality and Disclosure
- The DGIR Can Withdraw the Advance Ruling
- Situations in Which the Advance Ruling Ceases to Apply
- Fee Structure
- Internal Procedure
- Chapter 21: Malaysia Transfer Pricing Guidelines
- Introductory Provisions
- Malaysian Transfer Pricing Procedure
- Application of the Arm’s Length Principle
- Malaysia’s Transfer Pricing Regime
- Comparability and Transfer Pricing
- Transfer Pricing Alternatives
- Comparable Uncontrolled Price Transfer Pricing Method
- Resale Price Transfer Pricing Method
- Cost Plus Transfer Pricing Method
- Additional Transfer Pricing Methods
- Profit Split Transfer Pricing Method
- Residual Analysis Example
- Transactional Net Margin Method
- Intangible Property
- Transfer Pricing Services Regulations
- Documentation
- Malaysia Issues Advance Rulings Guidelines
- General Facts about of the Advance Ruling Procedure in Malaysia
- Binding Nature of an Advance Ruling
- Scope of the Advance Ruling Request
- Advance Ruling Application Procedure
- Advance Ruling Application Form
- Information Request Requirement
- Issuance of the Advance Ruling
- Advance Ruling Finality and Disclosure
- The DGIR Can Withdraw the Advance Ruling
- Situations in Which the Advance Ruling Ceases to Apply
- Fee Structure
- Internal Procedure
- Chapter 22: New Zealand Transfer Pricing Developments
- New Zealand Transfer Pricing Guidelines
- Initial Developments
- Arm’s Length Principle and the Pricing Methods
- Basics of the Transfer of Intangible Property
- Profit Split Method and the Joint Ownership of Intangible Property
- Profit Split Method
- Residual Profit Split Analysis
- Transactional Net Margin Method
- Market Penetration Techniques
- Australia’s Four-Step Process to Ascertain the Arm’s Length Approach
- Documentation
- Documentation and the Burden of Proof Rule
- Inland Revenue Seeks to Ascertain the Risks to the Revenue
- Retention of Records
- Transfer Pricing in Countries without a Double Tax Agreement
- Intangible Property Audits
- Trade Intangibles and Marketing Intangibles
- Ascertaining the Arm’s Length Amount for Intangible Property
- Ascertaining the Ownership of Intangible Property
- Factors in Ascertaining the Nature of Intangible Property
- Terms and Conditions of the Intangible Property Transfer
- Valuing Intangible Property
- Non-Owner’s Marketing Activities
- Applying the Profit Split Method to Intangible Property
- Intangible Property Planning
- Chapter 23: Philippine Transfer Pricing Regulations
- Chapter 24: Singapore Implements Advance Pricing Arrangement Procedure
- Objectives of the Supplementary Circular
- What the Supplementary Circular Provides
- Minimum Information Requirements
- Considerations for Accepting the APA
- Pre-Filing APA Process
- Formal APA Submission Procedures
- APA Review and Negotiations: Considerations and Requirements
- APA Roll-Back
- Discontinuation of the APA Process
- Nonsubmission of the APA Application
- Insufficient Level of Support during the APA Process
- Absence of Communication
- Effective Date
- Chapter 25: Singapore Transfer Pricing Consultation Process
- Chapter 26: Singapore Transfer Pricing Guidelines
- Chapter 27: Singapore Transfer Pricing Guidelines for Related Party Loans and Services
- Transfer Pricing Guidelines for Related Party Loans
- Two Loan Categories
- Facts and Circumstances to Determine Comparability Analysis
- Transfer Pricing Guidelines for Related Party Services
- Direct Charging versus Indirect Charging of Services
- Ascertaining the Arm’s Length Fee
- Routine Services and the 5% Markup
- Cost Pooling Contracts
- Strict Cost Pass-through
- Documentation
- Chapter 28: South Korea Transfer Pricing
- Background
- Related Party Transfer Pricing Relationships in Korea
- Computation of Indirect Ownership
- Economic Interest and Control
- Transfer Pricing Method Alternatives
- Information Requests and Documents
- Transfer Pricing Audits
- Permanent Establishment, Competent Authority, and Advance Pricing Agreements
- Thin Capitalization and Tax Havens
- Applying the “Most Reasonable Method” Standard to Determine Arm’s Length Price
- Underpayments and Overpayments
- Selecting Transfer Pricing Methods
- Reporting Methods for Determining Arm’s Length Price
- Advance Pricing Arrangements
- Sanctions Imposed on Failure to Comply with the Data Request
- Penalties
- Thin Capitalization Rules
- Debt under an Arm’s Length Situation
- Anti–Tax Haven Rules
- Scope of the “Tax Haven” Jurisdiction
- Computation of the Reserved Income Distributed Amount
- Gift Tax on Property Located Outside Korea
- Mutual Agreement Procedure
- International Tax Cooperation
- Chapter 29: Sri Lanka Transfer Pricing
- Associated Undertakings
- Arm’s Length Price
- Documentation
- Threshold for Applying Sri Lanka Transfer Pricing
- Advance Pricing Agreements
- Burden of Proof
- Implementation
- Annex 1: Test of Control—Associated Undertaking
- Annex 2: Arm’s Length Pricing Methodologies
- Annex 3: Appropriate Pricing Methodology—Factors to Consider
- Annex 4: Comparability of an Uncontrolled Transaction—Factors to Consider
- Annex 5: Prescribed Documentation
- Suggested Supporting Documents
- Chapter 30: Taiwan Transfer Pricing
- Chapter 31: Thailand Transfer Pricing
- Transfer Pricing Booklet
- Part 1: Tax Legislation Impacting Transfer Pricing
- Revenue Department of Thailand Departmental Instruction Paw 113/2545
- Part 2: Methodologies in Calculating Market Price
- Part 3: Process in Establishing the Market Price
- Process of Establishing the Market Price
- Guidelines on the Determination of Market Price
- Chapter 32: Vietnam Transfer Pricing
- Part Two: Advanced Applications
- Chapter 33: Services Transfer Pricing in Hong Kong and in Singapore
- Services Transfer Pricing in Hong Kong and in Singapore: Basic Comparison
- Hong Kong Services Transfer Pricing Methods
- Shareholder Activity and Stewardship Functions
- Financial Services Audit Example
- Deduction of Expenditures Paid for Intragroup Services
- “Objective Commercial Explanation” Standard
- Determining the Amount of Intragroup Charges
- Services Provided by a Permanent Establishment
- Scope of Activities for Related Party Services in Singapore
- Singapore Transfer Pricing Services Guidelines
- Direct Charging versus Indirect Charging of Services
- Ascertaining the Arm’s Length Fee
- Routine Services and the 5% Markup in Singapore
- Cost Pooling Contracts
- Cost Pooling versus Pass-Through Allocation Alternatives
- Documentation
- Chapter 34: Permanent Establishment Parameters: Hong Kong versus India
- Chapter 35: Pacific Tax Administrators Coordinate Transfer Pricing Documentation
- Chapter 36: Shared Services and Cost Pooling Arrangements in the United States and Singapore
- Chapter 37: South Korea–Japan Bilateral Investment Treaty
- Chapter 38: China–Taiwan Trade
- Taiwan and China: A History Lesson
- Economic Considerations
- One-China Policy
- Economic Cooperation Framework Agreement
- Tax Considerations
- Choice of Transfer Pricing Method
- Functional Analysis
- Analysis of the Production Activities
- Fact Pattern
- Accounting and Tax Operations
- Permanent Establishment
- Taiwanese–Chinese Electronics Company
- Transactional Profit Split Method Criteria
- Most Appropriate Transfer Pricing Method
- Allocation Key System
- Strong Correlation Standard
- Selecting among Allocation Keys
- APA Process
- Chapter 39: Malaysia–Singapore Allocation Keys
- Importance of Allocation Keys
- Selection of the Real Estate Leasing Example
- When the Transactional Profit Split Method Is the “Most Applicable” Transfer Pricing Method
- Specialized Services
- Applying the Transactional Profit Split Method
- Four Allocation Keys Categories
- Key Functions
- Selecting Potential Allocation Keys
- Residential Condominium Leasing Example
- Residential Condominium Database
- Selecting among Allocation Keys
- “Strong Correlation” Standard
- Allocation Keys
- Transfer Pricing Strategies
- Corporate Tax Strategy
- Malaysia’s Tax Strategy
- Chapter 40: Permanent Establishment Parameters
- OECD’s Permanent Establishment Provisions
- Consequences of Permanent Establishment Status
- Consequences of a Permanent Establishment to Business
- Transfer Pricing and Permanent Establishment
- Overall Tax Considerations
- Potential for the Imposition of Two Levels of Taxation
- OECD Approach to Determine Permanent Establishment
- Hong Kong Applies the OECD Permanent Establishment Provisions
- How Hong Kong Applies the Permanent Establishment Provisions
- Common Law Permanent Establishment Criteria
- Direct Activities
- Agency Relationships
- Shareholder Activities in Subsidiaries’ Locations
- Presence of Personnel Shifts among Entities
- Entirety of the Operations
- Declining Businesses
- “Preparatory to” and “Auxiliary from” Exemptions
- Time Spent
- Will the OECD Approach Prevail?
- Chapter 33: Services Transfer Pricing in Hong Kong and in Singapore
- About the Authors
- Index
Chapter One
Introduction
Transfer Pricing is a central ingredient to trade and commerce, to financing and accounting, and to law and economics. We have selected 15 countries in Asia and the Pacific where these transfer pricing components have grown in importance.
We have divided the Asia-Pacific Transfer Pricing Handbook into two parts: Part One: Country-by-Country Analysis and Part Two: Advanced Applications—complex transfer pricing issues.
PART ONE: COUNTRY-BY-COUNTRY ANALYSIS
For the convenience of the reader, we provide alphabetical country-by-country analysis. We examine these countries in the Asia-Pacific region:
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
New Zealand
Philippines
Singapore
Sri Lanka
Taiwan
Thailand
Vietnam
PART TWO: ADVANCED APPLICATIONS
The Asia-Pacific Transfer Pricing Handbook then examines transfer pricing issues that take place across borders:
- Hong Kong and Singapore
- India and Hong Kong
- Australia, Canada, Japan, and the United States
- Singapore and the United States
- Japan and South Korea
- China and Taiwan
- Malaysia and Singapore
- Hong Kong and India
Multinational institutions play a major role in the transfer pricing context. These organizations include the Organisation for Economic Co-operation and Development (OECD) and the Association of Southeast Asian Nations (ASEAN), including ASEAN + three. At this time, the OECD has 34 members, only 4 of which are in the Asia-Pacific region: Australia, Japan, New Zealand, and South Korea. Nevertheless, the broader Asia-Pacific group of 15 countries, which are the subject of this analysis, follow OECD principles. Most of the nonmember countries are already on track to become OECD members.
Today the ASEAN pact, including ASEAN + three, have moved slowly in addressing transfer pricing issues. In part, the ASEAN pact and ASEAN + three are reticent because some members do not have their own transfer pricing regimes.
Each country stands on its own, despite the impact of the OECD. In particular, these six developments are notable:
1. Japan took the lead in profit split techniques, and the OECD follows these techniques.
2. China and Vietnam address control issues, which the OECD fails to address.
3. Singapore is applying important techniques for the treatment of services in the transfer pricing context.
4. Hong Kong has developed anti–tax haven techniques and put these rules with its transfer pricing guidelines.
5. India is far ahead in case law developments, leaving the United States behind.
6. Australia is far ahead in developing pre-audit techniques for midsize businesses.
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