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The China State Administration of Taxation (SAT) recently affirmed in a paper for the United Nations transfer pricing project that they are generally consistent with the OECD guidelines, but that certain modifications may be needed to reflect the particular circumstances existent in China.

In particular, the SAT points out three key areas of concern:

  1. There is a lack of reliable public company information for companies in developing markets.
  2. That traditional transfer pricing does not recognize Local Special Advantages (LSA’s) in the developing countries.
  3. There are overstated foreign intangibles/understated local intangibles, and alternate methods to the transactional net margin method.

One aspect of the concerns is the lack of a clear definition of Local Special Advantages (LSA).  The general comments describe the typical reasons why any business locates a facility  within a specific area, such as proximity to workforce, materials, transportation etc.  While these reflect general business considerations for the location of a function, it does not follow that this is limited only to a developing country.

This along with the other concerns of the SAT will need further clarification as time and audits occur. One thing is certain: the stage is set for interesting discussions going forward.

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