New horizons of transferpricing - regulation changeupdates, current contextanalysis and newtechnology outlook转让定价新境界——法规现况全解析，科技创新畅远景

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PwC

Agenda

1. Regulation update

2. Tax administration point of view

3. China transfer pricing focuses

4. Technology TP Compliance Solutions — Segmentation Tool

5. TP Data Analytics

6. Using data analytics approach to address global growth issue

2

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Regulation update

3

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BEPS, UN and other perspectives

4

1990s

The UN issues ModelTaxation Conventionand Manual

OECD issues TransferPricing Guidelines forMultinationalEnterprises and TaxAdministrations

Global Forum onTransparency andExchange ofInformation for TaxPurposes

2010

UN issues DraftPractical Manual onTP for DevelopingCountries

2012

The G20 launchesBEPS project —potential magnitude ofannual lossesgenerated by the BEPSproblem wasestimated to be from4-10% of global CITrevenues

2014

The OECD issues itsreport on the impact ofBEPS on low incomecountries

2016

The OECD, IMF, UNand WB launch thePlatform forCollaboration on Tax

The OECD launchesthe InclusiveFramework

2007-2009

The Fall of LehmanBrothers

The Great Recession

2011

The UN issues theModel TaxationConvention betweenDeveloped andDeveloping Countries

2013

The OECD introducesthe BEPS Action Plan

The UN establishesthe Subcommittee onBEPS Issues forDeveloping Countries

2015

The UN issues thefirst handbook onprotecting the tax baseof developingcountries

The UN and OECDlaunch TIWB

OECD issues toolkiton incentives forinvestments for lowincome countries

2017

OECD issues toolkitson accessingcomparables data andtaxation of offshoreindirect transfers

MLI is signed by 70+countries

PwC

Recent update from OECD and UN

5

OECD/BEPS Update

• 2017 edition of the TransferPricing Guidelines forMultinational Enterprises andTax Administrations

• the updated guidance on theimplementation of Country-by-Country Reporting underBEPS Action 13

• Country-by-CountryReporting: Handbook onEffective Implementation

• Country-by-CountryReporting: Handbook onEffective Tax Risk Assessment

1United Nations Update

• UN Practical Manual onTransfer Pricing forDeveloping Countries (2017)

• 15th Session of the Committeeof Experts on InternationalCooperation in Tax Matters

- The digitalized economy:selected issues of potentialrelevance to developingcountries

2

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Three-pillar anti-avoidance administrationframework in China in post-BEPS arena

• Investigation: SAT Public Notice[2017] No. 06 — AdministrationMeasures of Special TaxInvestigation Adjustments andMutual Agreement Procedures,effective as of 1 May 2017

• Administration: SAT Public Notice[2016] No. 42 — Refining the Filingof Related Party Transactions andAdministration of ContemporaneousTransfer Pricing Documentation,effective of 1 January 2016

• Services (APA): SAT Public Notice[2016] No. 64) — Refining theAdministration of Advance PricingArrangements, effective as of 1December 2016

6

Administration(SAT Public Notice

[2016] 42)

Services(SAT Public

Notice [2016] 64)

Investigation(SAT Public

Notice [2017] 6)

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Snapshot of Public Notice 6

7

Snapshot ofPublic

Notice 6

Profit levelmonitoring &

Selfadjustment

Mutualagreementprocedures

Special taxinvestigation &

adjustment

TPadministration

on services

Comparabilityanalysis &

TP methods

TPadministrationon intangibles

Profit level monitoring & Selfadjustment

• Risk assessment by tax authoritythrough RPT disclosure,documentation, and profit levelmonitoring

• Self-adjustment by taxpayer

Special tax investigation &adjustment

• Investigation targets: 9 types• Investigation process• Information submission &

burden of proof• Special transactions or issues• Conclusion of case & tax

collection

Comparability analysis & TP methods

• Comparability analysis: 5 factors• TP methods• Valuation methods for intangible and

equity transfer• “Value contribution attribution method”

Mutual agreement procedures

• Applicants and applications• Acceptance or rejection• Submission of information• Procedures of initiation,

suspension, and termination• Implementation of agreement

TP administration on services

• Non-beneficial services:6 categories

• Benefit tests• Indirect charges

TP administration on intangibles

• Profit allocation in line with economicactivity and value creation

• DEMPE + Promotion• Legal ownership vs. economic ownership• Royalty rates should be adjusted in a

timely manner

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Highlights of Public Notice 6

8

What’s reaffirmed?

• Guaranteed profit for singlefunction entity (Circular GuoShui Han [2009] No 363)

• Voluntary self-adjustment (PublicNotice [2004] No 54)

• Outbound payments of servicefees and royalties (Public Notice[2015] No 16)

• Toll processor

• Location specific advantages

What’s New?

• Profit monitoring system

• Non tax resident enterprise asspecial tax audit target

• Disregarding offset transactionsor concealed transactions

• DEMPE + Promotion concept torecognize the China contributionin promotion of intangibles

• Exemption of APA applicantsfrom audit investigation

• Valuation methods

What’s dropped?

• Value Contribution AttributionMethod (?)

• Secondary adjustment — for now

PwC

Our observations— More pressure for taxpayers to make self adjustments

9

No mutual agreement procedures

Profit monitoringsystem, “Big data”and other analytics

Self-adjustments throughfilling in the “Special TaxAdjustments Self-PaymentForm”;

Tax authorities retain theright to launch special taxinvestigation adjustments ontaxpayers who have madeself-adjustments;

Confirmation of tax positionproposed by taxpayerstrigger audits;

Self-adjustments made ontransactions from 1 January2008 will be subject tointerest levy.

PwC

Our observations— More pressure for taxpayers to provide overseas information

10

More overseas information can berequested by China tax authorities(Master File, CbCR, financials of valuechain participants, etc.)

Emphasis to select the entity withrelatively less complex functions as thetested party

Refusal to provide or provision of falseor incomplete information duringinvestigation may lead to deemedtaxable income

Deemed taxable income

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Reflection: what is the new rule?

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• New principle: Profits should be taxed where economic activities take placeand value is created (G20, 2013).

• What does the new rule mean?

- How to define the profits?

- Does it mean that profits should be taxed - and only be taxed - whereeconomic activities take place and value is created?

- Does economic activities and value creation are the necessary nexus fortaxation right?

- Whether does the host country have the taxation right when value iscreated in this country but the relevant economic activities creating thevalue are performed outside country?

- How to reconcile the value chain analysis and the arm’s length principleanalysis (e.g. CUP method)?

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Tax administration point of view

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Tax administration point of view

13

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China transfer pricing focuses

14

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Value chain analysis

15

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Why are we discussing VCA?

16

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Why are we discussing VCA?

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Five VCA approaches

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Management Efforts increasing

Intermediate – Internaldata explored

Comprehensive – Bothexternal and internal dataanalysed

Complexityanduncertaintyincreasing

Method 1: Michael Porter styled VCA

Method 2: Industry approach(internal / industry expertperception)

Method 3: Function andrisk approach

Method 5: Empirical VCA approach

Method 4: Profitsplit approach (e.g.expense allocation)

Basic – Descriptive

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Typical issues of VCA

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• Too general and not entity specific (in particular when you have group entities inChina)

• VCA only shows static picture (which omits heritage and future trend)

• How to weight value (value judgment) is a subjective exercise (different tax authoritiesmay have different views)

• VCA may not be reconciled with arm’s length analysis (e.g. CUP method)

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Intangible transactions

20

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Intangible transactions

• Return for entities only providing funding withoutsubstantial functions performed/risks assumed inrelation to intangibles: only a reasonable return onthe funding cost

• Chinese tax authorities may make special taxadjustments on royalties that are notcommensurate with the economic benefitand result in a reduction in the taxable grossincome or taxable income of enterprises or theirrelated parties.

- Royalties to an overseas related party only withthe legal rights of the intangible asset, withoutany contribution to its value creation

- Royalties to a related party for incidental benefitsarising from financing or public listing activities

• Chinese tax authorities do not allow balancingpayment.

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DEMPE+

Promotionin China

Promotion

Enhancement

Development

MaintenanceProtection

Exploitation

“Allocation of income generated by intangibles shallbe commensurate with the commercial activitiesand contribution to its value creation”

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What are the “local intangibles” – an Indiaexample

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Marketing related intangibles trademarks, trade names, brand names, logos

Technology related intangibles process patents, patent applications, technical documentation such aslaboratory notebooks, technical know-how

Artistic related intangibles literary works and copyrights, musical compositions, copyrights, maps,engravings

Data processing related intangibles proprietary computer software, software copyrights, automateddatabases, and integrated circuit masks and masters

Customer related intangibles customer lists, customer contracts, customer relationship, open purchaseorders

Engineering related intangibles industrial design, product patents, trade secrets, engineering drawing andschema-tics, blueprints, proprietary documentation

Contract related intangibles favourable supplier, contracts, licence agreements, franchise agreements,non-compete agreements

Human capital related intangibles trained and organised work force, employment agreements, unioncontracts

Location related intangibles leasehold interest, mineral exploitation rights, easements, air rights, waterrights

Goodwill related intangibles institutional goodwill, professional practice goodwill, personal goodwill ofprofessional, celebrity goodwill, general business going concern value

And also… methods, programmes, systems, procedures, campaigns, surveys, studies,forecasts, estimates, customer lists, or technical data

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China considerations on local intangibles

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Function/risk profile +value chain analysis

Routinefunctions?

Excessiveexpenses compared

to peers?

Yes – Routinefunction

No – Non-routinefunction

Normaltreatment

No – Normal level ofoperating expenses

Extracompensation

Yes – Excessive expenses

No – No high-value IP

Profit Split Method(i.e., not one-sided

methods)

Compensation per value

Compensation per cost

Reduced royaltypayment

Yes – Create high-value IP

Createhigh-value

intangibles?

Reduced purchaseprices

• Technology related intangibles: R&D expenses super-deduction? HNTE taxincentives? TASE tax incentives?

• Marketing related intangibles: Chinese tax authorities look closely at local intangiblescreated, advertising and promotion (A&P) expenses incurred by Chinese subsidiaries

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Intra-group services

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Intra-group services

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Duplicative services; Services that benefit solely for beingpart of the group;

Services that have already beencompensated;

Services that are unrelated to thefunctions undertaken and risksassumed by service recipients, orrelated party services that are notrequired in the operations of theservice recipients;

Other related party services that donot provide economic benefits, orthat an unrelated party would nothave been willing to pay for or toperform itself.

Shareholder activities;

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Challenges to multinational corporations

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HQ Tax Authorities

• HQ services are beneficial tosubsidiaries

• HQ bears large amounts ofservice costs on behalf ofsubsidiaries

• Centralized service model isnecessary for MNCs’ effectiveoperation as a group Local Tax Authorities

• Whether centralized serviceprovides actual benefits tosubsidiaries

• How to validate the servicecost incurred by HQ

• How to justify the allocationmethod

• Project management• Sales management• Controlling• Supply chain

management• Corporate support,

e.g., HR, IT, finance,legal, etc.

A macro group lens A micro entity lens

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Location specific advantages

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Location specific advantages

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Location saving

• Location savings are the net cost savings derived bya multinational company when it sets up itsoperations in a low-cost jurisdiction. Net costsavings are commonly realized through lowerexpenditure on items such as raw materials, labour,rent, transportation and infrastructure even thoughadditional expenses (so-called dis-savings) may beincurred due to the relocation, such as increasedtraining costs in return for hiring less skilled labour.(Section D.2.4.4.3 of UN Manual)

• Focused industry: manufacturing, service, etc.

Market premium

• Market premium relates to the additional profitderived by a multinational company by operating ina jurisdiction with unique qualities impacting on thesale and demand of a service or product. (SectionD.2.4.4.4 of UN Manual)

• Focused industry: consumer products, automobiles,etc.

PwC

China’s four-step approach on LSA

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01

02

03

04

Identify if a LSA exists

Determine whether the LSAgenerates additional profit

Quantify and measure the additionalprofits arising from the LSA

Determine the transfer pricing method to allocate theprofits arising from the LSA

PwC

Technology TP Compliance Solutions— Segmentation Tool

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What we observe in filing segment financialsUnpunctuality

• The filing deadline (i.e. May 31st) sometimes passes before the completion of statutoryaudit report

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NotAvailable

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What we observe in filing segment financialsCommonly-observed issues

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Inaccuracy

• A mismatch of segment income and costper column

• The add-up of numbers per column notequivalent to the total amount

1

Incompleteness• Failure in submission of complete

financials, especially operating expensesand assets impairment losses

2

Inconsistency• Variance between the 22 forms and

disclosure in the local file report/auditreport

3

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What we observe in filing segment financialsPossible consequences

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Inaccuracy

Incompleteness

Inconsistency

Consequence

• The risk of national TP audit may beincreased due to inconsistentreporting among Chinesesubsidiaries of the same group

• The tax authorities may not careabout the quality. Is it true?

• Inconsistency in compliancereporting leads to a suspicion on theaccuracy of any disclosure

• Companies with low TP risks maybecome the targets for furtherinvestigation by the tax authorities

PwC

A different angle — the implication of RPT filing

Digitalization of related-party transactions

A comparison among the three versions, respectively released 1)with income tax of enterprises with foreign investment, 2) in 2008 and3) in 2016

Increasing complexity in RPT filing

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A different angle — the application of RPT filing

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Relevant Data Collection

• Collection of data at both national and provincial/municipal level

• An overview of overseas investment, cash flow, market condition, etc.

Macro Analysis

• Detection of erosion of the jurisdictional tax base by any related-party transaction,and its manifestation (i.e. key related-party risk exposure)

Micro Analysis

• The compliance of arm’s length principle at entity level

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A different angle — how to reduce the risk ofassessment/investigation

Well-prepared & supported RPT filing is recommended.

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False declaration or decline of RPT filing ?

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A new tool for TP compliance — what is theSegmentation Tool?

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A tailored solution to automaticallycapture the data to form the segmentedfinancial table in the required format

Efficiency

Replicable process withhigh level of consistencyand accuracy

Traceability

Ability to trace the sourceusing calculation

formulae and logicallocations

Accuracy

Minimise human error byautomating the captureof data from thesystem

Analytical

Effective risk andopportunity identification

through tax index and dataanalysis

TP Technology

SegmentationTool

We have a strong team of PwC transfer pricing (TP)

professionals and technology experts in China who can

provide you with in-depth industry insights, professional

knowledge and tax technology support, to unlock the power of

data and achieve the best outcome

Control ComplianceOur

Solution

Please refer to the following video for a betterunderstanding of the Segmentation Tool.

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TP Data Analytics

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Transfer pricing challenges we are facing…

Companies were once able to secure a large share of the global market byinvesting in few and familiar countries…

… today, however, competing for a similar share of the global marketplacerequires that companies maintain presence in a larger and more diverse setof countries.

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Share of Global GDP, 1980-2030

26% 27% 28% 26% 24% 22%

38% 38% 34%30% 25% 21%

26% 26% 27%33% 38% 44%

10% 10% 10% 12% 13% 13%

1980 1990 2000 2010 2020 2030

United States Other G7 Countries Other G20 Countries Rest of World

PwC

Transfer pricing challenges we are facing…

Companies are spending more resources to address global and localcompliance requirements…

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CbCR

Managementreport

RPT forms

TPdocumentation

Non-TRE filing

Outboundremittance

CbCRGlobal view of multinational’s operation in afast changing economic environment

RPT formsDetailed disclosure ofannual related partytransactions andorganizations involved

TP documentationMaster File, Local File andSpecial Issue File

Management reportContinuous monitoringand control of transferpricing related issues

Outbound remittanceIncreasing controversy inoutbound remittancerequires robust supportingdocuments to justifysubstance

Non-TRE tax filingStringent filing and information disclosurerequirements

PwC

Technology driven tax administration is on theway — one size fits all solution?

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Excel

• Most flexible

• Struggles withchanging data, andlarge volumes

Alteryx dataaggregation solution+ Analytics

• Alteryx Designer

• Direct visibility todata sources,blending and reports

• Direct export to datavisualization tools

• Easy to deploy

Custom databasesolution + Analytics

• MicrosoftAccess/SQL

• Simple tables andqueries to managedata and calculation

• Direct export to datavisualization tools

• Customize for clients

• Easy to deploy

Fully embeddedERP/BI solution

• SAP/PCM;Oracle/HPCM

• Integration at sourcedata level

• Most robustimplementation, buthighly complex as an‘afteradded’ feature

Ma

tur

ity

Time to implement

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Is Analytics approach a right solution?

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02Insights

Information to insightsApply new techniques on existing andnew data to generate insights.Create a test-and-learn environmentfor continuously harnessing theinsights.

04Outcomes

Decisions & actions to outcomesUnlock value by transformingbusiness function, business unit orindustry.Recruit and train talent to deliverimproved financial, market and riskmetrics.

Keys to success

Discovery

Observations to information

Find value in internal and external,structured and unstructured data.Automate data discovery, datacleansing, and analysis as much aspossible.

03Actions

Insights to decisions & actionsLink insights with decisions andactions to deliver quick wins.Compete with faster and moresophisticated decisions and actions.

01

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Using data analytics approach toaddress global growth issue

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The Global Growth Radar (GGR) is an analytic app thathelps companies make country prioritization decisions

Is the business beginning its global growth journey… or is it looking torebalance existing geographic focus or options? Either way, the GGR can help.

Illustrative Scenario — A $110B food and beveragesfirm has a presence in 60 countries. Lately, growth hasslowed, and the firm knows it needs to shift focus tosome higher-growth emerging markets. It needs anapproach to support a tough re-allocation decision.

Optimizing an existing footprint…

Illustrative Scenario — A $500M biotech firm wantsto get maximum value out of its recently patented anti-obesity drug. The firm already has an aggressive NorthAmerican growth strategy, but needs help architecting acomparably ambitious expansion overseas.

Beginning the global journey…

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The Radar calculates attractiveness scores for countries,based on the aggregation of Country, Industry, andCorporate metrics

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Global Growth Radar — Framework

CorporateScore

AddressableMarket

MarketDrivers

Competition

Regulation

Distribution

FinancialPerformance

StrategicFit

AssetFit

RiskAppetite

CorporateCulture

Infra-structure

BusinessEnvironment

Demo-graphics

Politics

Economy

MarketAttractiveness

Score

• The Global Growth Radar is based on a complexbut logically intuitive analytical model that enablesa structured, heuristic prioritization ofcountries.

• The Radar is built on the foundation ofdozens of Metrics, some of which may bederived from qualitative analysis.

• The metrics feed into 15 Dimensions (seen onthe outer wheel) (e.g., Economy, Politics, BusinessEnvironment, etc.).

• The dimensions roll up into three Scores:Country, Industry, and Corporate scores.

- The weighted average of the three categories isthe Market Attractiveness Score.

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The Radar’s 15 dimensions cover the full range of globalgrowth considerations, across Country, Industry, andCorporate dynamics

The Radar helps clients drive countryprioritizations based on nuanced,multi-dimensional considerations.No key questions need to be leftunasked.

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Country-level Considerations

Economy Is current economic growth likely to continue?

Politics Will the government carry out needed policy reforms?

Demographics Is the 65+ population growing faster than other age group?

Business Environment Is corruption getting better or worse?

Infrastructure How easy is it to move products into smaller cities?

Industry-level Considerations

Addressable Market How big is the local market for my products?

Market Drivers What is the population of my preferred customer segments?

Competition How strong is the local competition?

Regulation How efficient are local regulatory entities?

Distribution To what extent do people use the Internet to buy products?

Corporate-level Considerations

Financial Performance What were our sales in the country last year?

Asset Fit Are we able to leverage offices in nearby countries?

Strategic Fit Would an investment in this market fit with our growth strategy?

Risk Appetite Are we comfortable with a big play in emerging markets?

Corporate Culture Should we target Francophone countries?

PwC

How to start our TP analytics journey?

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Data Blending

• Directly link and aggregate data from variety of sources

• Seamlessly compile standardized data collection packages

• Map disparate data from system to system to normalize across platforms

Process Automation

• Re-perform discrete calculations via an automated and systematic process

• Automate workpapers by compiling all data sets in stored repeatable processes

• Enable diagnostics to increase control, improve reviewand reduce risk

Modelling and Visualization

• Results are extracted to analytic dashboards

• Enhanced audit trail for complex calculations

• Visualization of diagnostics across multiple iterations

• Comparison of various scenarios to determine ideal planning opportunities

• Store both source data and calculation results in a centralized location

• Enable easy access to data for audit support and planning

• Tax control of data is fundamental to developing efficient processes

• Facilitates improved reporting and forecasting

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Join PwC TP analytics academies to explore more…

Efficiencies — reduce the timeand money spent on taxcompliance and utilize the timesavings to drive enterprise value

TP Analytics Academies provide an introduction to the practice of data analytics and datavisualization, as well as hands-on training with tools that enable tax departments to startthe journey with TP Analytics.

The combination of low-cost, user-friendly “drag and drop” interfaces enable taxprofessionals to harness data while automating burdensome processes. The analyticsprovide insights for monitoring, planning, forecasting and decision automation.

Value to the tax professionals

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Enhanced reporting— access centralized data in asimplified and flexible fashionwith the ability to create ad-hocreports & queries

Increase collaboration— share centralized data in aformat that invites collaborationand shortens decision timelines

Business agility — automatethe identification of exceptionsand over/underperformingareas

Holistic TP footprintview — see tax operations andglobal tax liabilities in a newlight

Analyze large data sets— display a variety of datapoints and measures in a waythat makes it easier to analyzelarge volumes of data

Thank you!

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.Please see www.pwc.com/structure for further details.CN-20171102-2-C3