Asia-Pacific Transfer Pricing Handbook

Robert Feinschreiber (Key Biscayne, FL) is an attorney with Feinschreiber and Associates. He has had numerous career highlights (e.g., youngest full-time law professor in the United States when appointed (Wayne State University), age 23; member of the litigation team for the first Asian transfer pricing case (Toyota)). In addition, he is a consultant with the United Nations (Brazil, China, and Russia). Feinschreiber is on the editorial board of Wolters Kluwer — CCH, and Thomson — RIA. He has written over 25 books and is the co-editor of Corporate Business Taxation Monthly (CCH). He speaks at numerous conferences in the United States and Asia.Margaret Kent (Key Biscayne, FL) is an attorney with Feinschreiber and Associates. She focuses on law and international taxation. She has been involved in a number of international transactions (i.e., structured the termination of the $2 billion per year aid from Russia to Cuba; structured transfer pricing in Latin America: Argentina, Chile, Colombia, Costa Rica, and Venezuela). Kent is also the co-editor of Corporate Business Taxation Monthly (CCH).

• Preface xxiPART ONE: COUNTRY-BY-COUNTRY ANALYSIS 1Chapter 1 Introduction 3Part One: Country-by-Country Analysis 3Part Two: Advanced Applications 4Chapter 2 Australia’s Risk Assessment Transfer Pricing Approach 7Introductory Issues 8Transfer Pricing Reviews 8Documentation Requirements 10Preparation of the Documentation File 11Applying the Arm’s Length Principle 13Simplified Approach to Doing a Benchmarking Study 13Four Steps for Testing International Transfer Prices 14Decision Tree 16How the ATO Scores Risk 16Scoring the Three Levels 17Score Graph 18Outcome of Transfer Pricing Review or Audit 19Audits Taking Place in Low-Risk Situations 20Transfer Pricing Review Process 20Categorizing the Results of the Transfer Pricing Review 21How the Australian Transfer Pricing Audit Procedure Works 22Australia’s Four-Step Process for Businesses 22Chapter 3 Profit Attribution for a DependentAgent’s Permanent Establishment in Australia 25Permanent Establishment Concepts in Australia 26Profit Attribution Concepts in Australia 26The ATO’s Operational Approach 26Determining Functional Analysis for a Permanent Establishment 27Comparative Analysis for the Permanent Establishment 29Application of the Resale Price Method 31Application of the Cost Plus Method 31Using a Transactional Net Margin Method 32Using a Profit Split Method 32Toll Manufacturers 34Four Examples 35Notes 47Chapter 4 Australia’s Advance Pricing Arrangement Program 49Pre-Formal APA Discussions 50APA Processing Times 51Unilateral and Bilateral APAs 52The ATO’s APA Work in Process 52APA Issues and Methods 52Chapter 5 China Implements Transfer Pricing Procedures 55Overview 55Regulations 56Chapter 1: General Principles 56Chapter 2: Reporting and Filing of Related Party Transactions 59Chapter 3: Administration of Contemporaneous Documentation 62Chapter 4: Transfer Pricing Methods 66Chapter 5: Transfer Pricing Audits and Adjustments 71Chapter 6: Administrative Guidance Concerning Advance Pricing Arrangements 78Chapter 7: Administrative Guidance Concerning Cost Sharing Agreements 87Chapter 8: Administrative Guidelines Concerning Controlled Foreign Corporations 91Chapter 9: Administrative Guidance Concerning Thin Capitalization 93Chapter 10: Administrative Guidance Concerning General Anti-Avoidance 96Chapter 11: Corresponding Adjustments and International Negotiations 98Chapter 12: Legal Responsibility 99Chapter 13: Supplementary Provisions 101Notes 102Chapter 6 Reporting Related Party Transactions in China 105Form 1—Related Party Relationships 106Form 2—Summary of Related Party Transactions 109Form 3—Purchases and Sales 111Form 4—Services Form 112Form 5—Intangible Assets 113Form 6—Fixed Assets 113Form 7—Financing 114Form 8—Outbound Investment 115Form 9—Outbound Payments 118Notes 119Chapter 7 Hong Kong Advance Ruling Cases: Taxability of Profits 121Advance Ruling Process 121Advance Ruling Case No. 4 122Advance Ruling Case No. 8 123Advance Ruling Case No. 9 125Advance Ruling Case No. 10 126Advance Ruling Case No. 11 127Advance Ruling Case No. 12 128Advance Ruling Case No. 13 130Advance Ruling Case No. 16 132Advance Ruling Case No. 19 133Advance Ruling Case No. 21 134Advance Ruling Case No. 23 135Advance Ruling Case No. 26 136Advance Ruling Case No. 30 137Advance Ruling Case No. 34 138Advance Ruling Case No. 35 139Advance Ruling Case No. 36 140Advance Ruling Case No. 37 141Chapter 8 Hong Kong Transfer Pricing Guidelines 143Double Tax Agreements 143Arm’s Length Principle 143Associated Enterprises 145Appropriate Adjustments 146Inland Revenue Ordinance and Case Law 147Permanent Establishment Considerations 150Applying the Arm’s Length Principle 151Four Steps 153Functional Analysis 153Comparability Analysis 154Determining Comparability 155Functions, Assets, and Risks 155Contract Terms 157Economic and Marketing Circumstances 158Business Strategies 158Global Price Lists 159Establishing the Reliability of the Data 160Transfer Pricing Methodologies 160Sources of Profi ts and Income 162Abusive Tax Schemes 163Transfer Pricing Schemes 164Transfer Pricing Documentation 166Intragroup Services Arrangements 169Deduction of Expenditures Paid for Intragroup Service 170Determining the Amount of Intragroup Charges 171Services Provided by a Permanent Establishment 173Notes 174Chapter 9 Hong Kong Challenges Abusive Tax Schemes 175Macroeconomic Issues 176Abusive Tax Schemes 177Transfer Pricing Schemes 178Lack of “Economically Significant Functions” 179How the Hong Kong Government Combats Abusive Tax Schemes 179Extreme Forms of Tax Abuse 180Distinguishing Tax Avoidance from Tax Evasion 180How the Reinvoicing Structure Operates 181Shifting Intangible Property: The Tax Perspective 182Notes 184Chapter 10 Winning Hong Kong’s Landmark Transfer Pricing Case 185Ngai Lik Litigation 185Hong Kong’s Advance Ruling Determinations 186Hong Kong Issues Transfer Pricing Guidelines 186Statutory Provisions 187Determination by the Court of Final Appeal 188The Commissioner’s Determination 188Determination by the Board of Review 189Determination by the Court of First Instance 189Determination by the Court of Appeal 190The Case before the Court of Final Appeal 191Deficiencies in the Scheme as to Additional Annual Bulk Discounts Received by Din Wai Electronics Limited 192Deficiencies in the Scheme as to Manufacturing Profits 193Deficiencies in the Scheme as to the Relevant Years of Assessment 196Are the Scheme and the Tax Benefit Still Viable Bases for Section 61A Assessments? 196Is There a “Tax Benefi t” within the Meaning of Section 61A? 197The Narrower Scheme and the Narrower Tax Benefit 197Dominant Purpose of the Narrower Scheme 198Board of Review’s Approach 199Ribeiro’s Dominant Purpose of the Narrower Scheme 200Commissioner’s Assessment Power 202Commissioner’s Exercise of the Section 61A(2) Power 202Board’s Approach to the Exercise of the Section 61A(2) Power 203Disposal of the Appeal 203Notes 204Chapter 11 Transfer Pricing Litigation in India 205Background 205Transfer Pricing Chronology and Administration 206Related Parties 207Transfer Pricing Method Selection in India 208Contemporaneous Documentation in India 209Audit Procedures 210Penalties 211Appellate Procedures 212Transfer Pricing Litigation 213Vodafone: Hutchison Essar Acquisition 215Notes 215Chapter 12 PE Issues Impact Indian Transfer Pricing 217Background 218Nexus, Effectively Connected Status, and Permanent Establishment 218Four Fact-Based Permanent Establishment Inquiries 219Impact of the Morgan Stanley Case 220Permanent Establishment Transfer Pricing Litigation in India 220Galileo 221Hotel Scopevista 222WorleyParsons 223KnoWerx Education 223ICICI Bank 224Zimmer AG 225Intergrafica 226Ranbaxy Laboratories 226Development Consultants 227Perfitti 228Data Software Research 229SNC Lavalin /Acres Inc. 229Airport Authority of India 230Radha Rani Holdings 231Mashreq Bank PSC 232Mentor Graphics (Noida) Pvt. Ltd. 232Millennium Infocom Technologies Ltd. 233Van Oord ACZ India 233Tokyo Marine & Fire Insurance Co. Ltd. 234Western Union Money Transfer 235Cargo Communities Network 235Hyundai Heavy Industries 235E. Gain Pvt. Ltd. 236Infosys International Activities in New York State 236Chapter 13 Taxation of Travel Services in India 239Sabre 240Galileo 243Installed Hardwire 245Notes 245Chapter 14 Transfer Pricing in Indonesia 247Historical Background 247Transfer Pricing Considerations 248Special Attachment 249Chapter 15 Japan’s Directive on Transfer Pricing Operations 251Background 251Regulations and the Examples—How They Differ 252Operation of the Japanese Transfer Pricing Administrative Guidelines 253Chapter 1: Defi nitions and Basic Policies 253Chapter 2: Examination 254Chapter 3: Points to Note in Calculating Arm’s Length Prices 269Chapter 4: Treatment of Foreign Transferred Income 272Chapter 5: Advance Pricing Arrangements 274Notes 288Chapter 16 Selecting the Arm’s Length Price in Japan 289Background 290Demonstrating the Selection of Arm’s Length Price 290Selection of the Method of Calculation of Arm’s Length Price 290Case 1: Use of the Comparable Uncontrolled Price Method 291Case 2: Use of the Resale Price Method 299Case 3: Use of the Cost Plus Method 301Case 4: Methods Consistent with the Comparable Uncontrolled Price Method 303Case 5: Methods Consistent with the Cost Plus Method 307Case 6: Transactional Net Margin Method 311Case 7: Contribution Profi t Split Method 316Case 8: Residual Profi t Split Method 320Case 9: Adjustment for Differences 323Notes 325Chapter 17 Applying Japanese Intangible Transfer Pricing Methods 327Case 10: Intangibles Created by R&D and Marketing Activities 328Case 11: Distribution Channels and Quality Control Know-How 333Case 12: Know-How Accumulation through Human Resource Business Activities 335Case 13: Contributions to Create, Maintain, and Develop Intangible Properties 339Case 14: A Company Bearing only the Cost of Creation of the Intangible Properties 341Case 15: Intangible Properties for Employees on Loan 343Chapter 18 Japanese Profi t Split Transfer Pricing Methods 345Case 16: Applying the Profi t Split Method to a Series of Foreign-Related Transactions 346Case 17: Excluding Transactions from the Profit Split Method 349Contents xiiiCase 18: Calculation of the Profi t to Be Split 352Case 19: Differences in Labor Costs Impact the Residual Profit Split Method 358Case 20: Treatment of Market Fluctuations 361Case 21: Calculation of Basic Profi t 364Case 22: Factors for Splitting the Residual Profit 367Chapter 19 Japanese Guidelines Address Diverse Transfer Pricing Issues 373Case 23: Determining Whether Services Provide Commercial Value 373Case 24: Multiple-Year Considerations 377Case 25: Establishing the Target Profit Margin 380Case 26: Critical Assumptions 384Chapter 20 Malaysia Advance Ruling Guidelines 387General Facets of the Advance Ruling Procedure in Malaysia 388Binding Nature of an Advance Ruling 388Scope of the Advance Ruling Request 389Circumstances in Which Malaysia Tax Authorities Will Not Issue an Advance Ruling 390Circumstances in Which the DGIR Can Decline to Issue an Advance Ruling 391Notice Requirements 392Advance Ruling Application Procedure 392Advance Ruling Application Form 393Information Request Requirement 394Issuance of the Advance Ruling 394Advance Ruling Finality and Disclosure 395The DGIR Can Withdraw the Advance Ruling 396Situations in Which the Advance Ruling Ceases to Apply 396Fee Structure 397Internal Procedure 397Notes 397Chapter 21 Malaysia Transfer Pricing Guidelines 401Introductory Provisions 401Malaysian Transfer Pricing Procedure 402Application of the Arm’s Length Principle 403Malaysia’s Transfer Pricing Regime 403Comparability and Transfer Pricing 404Transfer Pricing Alternatives 407Comparable Uncontrolled Price Transfer Pricing Method 407Resale Price Transfer Pricing Method 409Cost Plus Transfer Pricing Method 411Additional Transfer Pricing Methods 413Profit Split Transfer Pricing Method 414Residual Analysis Example 415Transactional Net Margin Method 418Intangible Property 419Transfer Pricing Services Regulations 420Documentation 421Malaysia Issues Advance Rulings Guidelines 423General Facts about of the Advance Ruling Procedure in Malaysia 423Binding Nature of an Advance Ruling 424Scope of the Advance Ruling Request 425Advance Ruling Application Procedure 427Advance Ruling Application Form 428Information Request Requirement 429Issuance of the Advance Ruling 429Advance Ruling Finality and Disclosure 431The DGIR Can Withdraw the Advance Ruling 431Situations in Which the Advance Ruling Ceases to Apply 432Fee Structure 432Internal Procedure 433Notes 433Chapter 22 New Zealand Transfer Pricing Developments 439New Zealand Transfer Pricing Guidelines 440Initial Developments 440Arm’s Length Principle and the Pricing Methods 441Basics of the Transfer of Intangible Property 442Profit Split Method and the Joint Ownership of Intangible Property 443Profit Split Method 444Residual Profit Split Analysis 444Transactional Net Margin Method 445Market Penetration Techniques 445Australia’s Four-Step Process to Ascertain the Arm’s Length Approach 446Documentation 446Documentation and the Burden of Proof Rule 447Inland Revenue Seeks to Ascertain the Risks to the Revenue 447Retention of Records 448Transfer Pricing in Countries without a Double Tax Agreement 449Intangible Property Audits 450Trade Intangibles and Marketing Intangibles 450Ascertaining the Arm’s Length Amount for Intangible Property 451Ascertaining the Ownership of Intangible Property 451Factors in Ascertaining the Nature of Intangible Property 452Terms and Conditions of the Intangible Property Transfer 453Valuing Intangible Property 454Non-Owner’s Marketing Activities 454Applying the Profi t Split Method to Intangible Property 455Intangible Property Planning 456Chapter 23 Philippine Transfer Pricing Regulations 457Scope of the Philippine Provisions 458Philippine-Specific Provisions 458Chapter 24 Singapore Implements AdvancePricing Arrangement Procedure 461Objectives of the Supplementary Circular 462What the Supplementary Circular Provides 462Minimum Information Requirements 462Considerations for Accepting the APA 463Pre-Filing APA Process 464Formal APA Submission Procedures 466APA Review and Negotiations: Considerations and Requirements 467APA Roll-Back 468Discontinuation of the APA Process 469Nonsubmission of the APA Application 469Insuffi cient Level of Support during the APA Process 470Absence of Communication 470Effective Date 471Notes 471Chapter 25 Singapore Transfer Pricing Consultation Process 475Background 475Objectives of the Transfer Pricing Consultation 476Issuance of the Transfer Pricing Questionnaire 476Transfer Pricing Consultation 477Transfer Pricing Questionnaire 478Notes 480Chapter 26 Singapore Transfer Pricing Guidelines 481Key Concepts and Arm’s Length Principles 482Three-Step Approach 483Comparison of Economically Signifi cant Functions 483Comparable Uncontrolled Price Method 484Transfer Pricing Method Selection 484Transfer Pricing Documentation 488Mutual Agreement Procedures 490Advance Pricing Agreements 491Comments 491Notes 491Chapter 27 Singapore Transfer Pricing Guidelines for Related Party Loans and Services 493Transfer Pricing Guidelines for Related Party Loans 494Two Loan Categories 494Facts and Circumstances to Determine Comparability Analysis 496Transfer Pricing Guidelines for Related Party Services 497Direct Charging versus Indirect Charging of Services 499Ascertaining the Arm’s Length Fee 500Routine Services and the 5% Markup 500Cost Pooling Contracts 503Strict Cost Pass-through 504Documentation 505Notes 506Chapter 28 South Korea Transfer Pricing 507Background 507Related Party Transfer Pricing Relationships in Korea 508Computation of Indirect Ownership 509Economic Interest and Control 509Transfer Pricing Method Alternatives 510Information Requests and Documents 512Transfer Pricing Audits 514Permanent Establishment, Competent Authority, and Advance Pricing Agreements 515Thin Capitalization and Tax Havens 515Applying the “Most Reasonable Method” Standard to Determine Arm’s Length Price 516Underpayments and Overpayments 517Selecting Transfer Pricing Methods 517Reporting Methods for Determining Arm’s Length Price 518Advance Pricing Arrangements 518Sanctions Imposed on Failure to Comply with the Data Request 520Penalties 520Thin Capitalization Rules 521Debt under an Arm’s Length Situation 522Anti–Tax Haven Rules 522Scope of the “Tax Haven” Jurisdiction 523Computation of the Reserved Income Distributed Amount 524Gift Tax on Property Located Outside Korea 524Mutual Agreement Procedure 525International Tax Cooperation 525Note 526Chapter 29 Sri Lanka Transfer Pricing 527Associated Undertakings 528Arm’s Length Price 528Documentation 529Threshold for Applying Sri Lanka Transfer Pricing 529Advance Pricing Agreements 530Burden of Proof 530Implementation 530Annex 1: Test of Control—Associated Undertaking 530Annex 2: Arm’s Length Pricing Methodologies 531Annex 3: Appropriate Pricing Methodology—Factors to Consider 536Annex 4: Comparability of an Uncontrolled Transaction—Factors to Consider 536Annex 5: Prescribed Documentation 537Suggested Supporting Documents 538Chapter 30 Taiwan Transfer Pricing 539Enactment of the Transfer Pricing Statute 539Transfer Pricing Regulations 540Chapter 31 Thailand Transfer Pricing 547Transfer Pricing Booklet 548Part 1: Tax Legislation Impacting Transfer Pricing 548Revenue Department of Thailand Departmental Instruction Paw 113/2545 549Part 2: Methodologies in Calculating Market Price 554Part 3: Process in Establishing the Market Price 554Process of Establishing the Market Price 556Guidelines on the Determination of Market Price 557Chapter 32 Vietnam Transfer Pricing 559Expansive View of Related Party Ownership 560Transfer Pricing Methods 560Documentation Requirements 561Compliance Considerations 561PART TWO: ADVANCED APPLICATIONS 565Chapter 33 Services Transfer Pricing in Hong Kong and in Singapore 567Services Transfer Pricing in Hong Kong and in Singapore: Basic Comparison 567Hong Kong Services Transfer Pricing Methods 568Shareholder Activity and Stewardship Functions 569Financial Services Audit Example 570Deduction of Expenditures Paid for Intragroup Services 570“Objective Commercial Explanation” Standard 571Determining the Amount of Intragroup Charges 572Services Provided by a Permanent Establishment 573Scope of Activities for Related Party Services in Singapore 574Singapore Transfer Pricing Services Guidelines 575Direct Charging versus Indirect Charging of Services 576Ascertaining the Arm’s Length Fee 577Routine Services and the 5% Markup in Singapore 577Cost Pooling Contracts 580Cost Pooling versus Pass-Through Allocation Alternatives 582Documentation 583Notes 583Chapter 34 Permanent Establishment Parameters: Hong Kong versus India 585General Permanent Establishment Considerations 586Permanent Establishment Considerations in India 586Permanent Establishment Considerations in Hong Kong 588Chapter 35 Pacific Tax Administrators Coordinate Transfer Pricing Documentation 591Background 591PATA Provisions 593Three Operative Principles 594Specifi c Mandatory Documentation 596Notes 603Chapter 36 Shared Services and Cost Pooling Arrangements in the United States and Singapore 605Historical Background 606Explanation of the Shared Services Arrangement Provisions 606Shared Services Arrangements 608Services Cost Method Examples 611Singapore Shared Services Arrangements 620Notes 622Chapter 37 South Korea–Japan Bilateral Investment Treaty 623Background 623U.S. Involvement in BITS 624Arbitration 624ICSID Arbitration 624Treaty Shopping within the Bilateral Investment Treaty Context 625Tax Provisions within the Korea–Japan Bilateral Investment Treaty 626Chapter 38 China–Taiwan Trade 629Taiwan and China: A History Lesson 629Economic Considerations 630One-China Policy 630Economic Cooperation Framework Agreement 631Tax Considerations 632Choice of Transfer Pricing Method 633Functional Analysis 634Analysis of the Production Activities 634Fact Pattern 635Accounting and Tax Operations 635Permanent Establishment 636Taiwanese–Chinese Electronics Company 636Transactional Profi t Split Method Criteria 637Most Appropriate Transfer Pricing Method 637Allocation Key System 637Strong Correlation Standard 638Selecting among Allocation Keys 638APA Process 640Notes 640Chapter 39 Malaysia–Singapore Allocation Keys 643Importance of Allocation Keys 643Selection of the Real Estate Leasing Example 644When the Transactional Profit Split Method Is the “Most Applicable” Transfer Pricing Method 644Specialized Services 645Applying the Transactional Profit Split Method 646Four Allocation Keys Categories 647Key Functions 647Selecting Potential Allocation Keys 648Residential Condominium Leasing Example 648Residential Condominium Database 650Selecting among Allocation Keys 650“Strong Correlation” Standard 651Allocation Keys 652Transfer Pricing Strategies 656Corporate Tax Strategy 657Malaysia’s Tax Strategy 657Notes 658Chapter 40 Permanent Establishment Parameters 659OECD’s Permanent Establishment Provisions 660Consequences of Permanent Establishment Status 660Consequences of a Permanent Establishment to Business 661Transfer Pricing and Permanent Establishment 661Overall Tax Considerations 662Potential for the Imposition of Two Levels of Taxation 662OECD Approach to Determine Permanent Establishment 663Hong Kong Applies the OECD Permanent Establishment Provisions 663How Hong Kong Applies the Permanent Establishment Provisions 664Common Law Permanent Establishment Criteria 665Direct Activities 665Agency Relationships 666Shareholder Activities in Subsidiaries’ Locations 667Presence of Personnel Shifts among Entities 668Entirety of the Operations 668Declining Businesses 668“Preparatory to” and “Auxiliary from” Exemptions 669Time Spent 669Will the OECD Approach Prevail? 669Notes 670About the Authors 671Index 673