China And Japan Negotiate Significant Advanced Pricing Agreement

by Mary Swire, Tax-News.com, Hong Kong

26 May 2005

The tax authorities of China and Japan have negotiated the first-ever advance pricing agreement (APA) for a major Japanese electronics company, paving the way for multinational companies from other countries to invest in China, while reducing the risk of double taxation.

"The decision has wide ranging implications for other multinationals doing business in China, related to the level of risk, time, and expense they incur when calculating certain taxes," explained Bill Dodge, a partner with Deloitte Tax LLP and leader of the Global Transfer Pricing practice, which helped negotiate the agreement.

"For the first time, multinationals have the option to negotiate certain tax burdens up to five years in advance, rather than separately determining and defending each year," he added.

Transfer pricing refers to the allocation of profits, for tax purposes, across parts of a multinational company. The tax laws of many countries require that companies establish an 'arm's length' price for a product or service. For example, if a US-based company purchases a component from one of its divisions in China, the price must be similar to a 'comparable' price that another company in the United States would have paid for the same component.

An advance pricing agreement (APA) allows a company to negotiate the price of a product or service associated with transfer pricing over a period up to five years, rather than renegotiating at the end of each year. This helps companies plan their future tax liabilities, reduce the risk of noncompliance, and minimize the time and cost of determining and defending on a yearly basis.

"The decision demonstrates that the Chinese taxation authorities continue to become more transparent in taxation matters, and are willing to follow generally accepted principles from other countries," added Dodge.

"Multinational companies now have the ability to operate more efficiently in China, with easier tax planning, reduced preparation or negotiation costs and less risk," he observed.

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