International Taxation

D Dahn J LeahyD.Dahn J. Leahy 6-19-2008

Legal Entity Modelg y• What is your tactical

business plan?business plan?• What business design

have you chosen?T i l b ll– Typical buy-sell arrangement

– Limited risk distributorContract manufacturer– Contract manufacturer

– Commissionaire/FSO office• What are the commercial

i k ?risks?• What are your internal

requirements?q• What are the statutory

requirements?

Legal Entity ModelsT Buy sell Limited Risk Commissionaire AgentType Buy-sell Limited Risk

DistributorCommissionaire Agent

Legal title of goods Distributor to customer, DT has title

LRD to customer, LRD has flash title

Principal direct to customer

Principal direct to customer

Invoicing the Customer

Distributor invoices customer

LRD invoices customer

Commissionaire invoices customer

Principal invoices customer

Advantages Centralized inventory & Central inventory risk Central inventory risk & Central inventory g yownershipCentralized functions & risksRelatively simple to implement

y& ownershipCentralized functions & risksRelatively simple to implement

yownershipSame face to customerLow PE risksCentralized functions and risks possible

yrisk & ownershipCentralized functions & risksRelatively simple to implementp e e t

Low PE riskSame face to customer

p e e tLow PE riskSame face to customer

and risks possible p e e t

Disadvantages AR on the books of sales companyHigher reported sales in local entityB i k b th

AR on the books of sales companyHigher reported sales in local entity; e.g. stat reporting

VAT & Acc’t complex to implement due to buy-sell for VAT and Commissionaire agent for accounting

Two faces to the customer [sales & Invoice] PE risk for principalC i i kBears more risk; both

operational & commercial

reporting Bears less risk; e.g. currency exposure

for accountingPE risks in common law countries; e.g. UK

Conversion risk may be higher

Manage RiskManage Risk

Model:Model:

Identify Manage Monitor Report

This process can be used for foreign exchangeThis process can be used for foreign exchange, Interest rate management and other

exposures

What is the company risk profile?

Formulate a strategyFormulate a strategy

• Model:Strategy Execution

Model: Contingency Plan

Develop a ViewDevelop a View

Tax/Treasury

Economic informationIndustry Information

Statistical InformationMarket Information

Controller/exposure Analysis & data

Identified exposure

Goals & objectives

Identified exposureyAnalysis & data

Organisation for Economic Co-operation and Development [OECD]Development [OECD]

• Taxationwww.oecd.org/taxation

• The OECD helps policy makers shape the tax systems of the 21st century. The Centre for Tax Policy and Administration examines all aspects of taxation, including tax policy and taxPolicy and Administration examines all aspects of taxation, including tax policy and tax administration. It also fosters dialogue with non-OECD economies, thereby promoting international co-operation in taxation.

• This involves dialogue with more than 80 non-OECD economies and includes work on negotiating, applying, and interpreting tax treaties, transfer pricing and effective exchange of informationinformation.

• Major statistical publications provide annual comparisons of tax levels and tax structures in member countries. The Centre works with other directorates on issues with a strong tax component such as the impact of taxation on the functioning of labour markets.

• Tradewww oecd org/tradewww.oecd.org/trade

• Trade and investment liberalisation has stimulated economic growth and has been a key factor in integrating an expanding number of countries in the world economy. The Trade Directorate's work supports a strong, rules-based multilateral trading system that will maintain momentum for progressive trade liberalisation and rules-strengthening while contributing to rising standards of li i d t i bl d l t i OECD d OECD t i It t th fliving and sustainable development in OECD and non-OECD countries. It supports the process of liberalisation flowing from multilateral trade negotiations in the World Trade Organization (WTO) and the effective functioning of the multilateral trading system.

• Its analytical work seeks to underpin the rationale for continued trade liberalisation and to foster an understanding of the links between trade liberalisation and a range of issues of public concern. This work advances an informed debate and helps build consensus. The directorate is involved in analysis and preparations for ongoing and future trade negotiations that may cover new categories of trade rules. At the same time, its analysis of evolving trade issues and policies can help forestall problems that emerge under the pressure of ever-intensifying competition.

Intercompany Transfer PricingIntercompany Transfer PricingWhy ICTP?

L l i• Legal requirements– Documentation requirements

• Statutory obligations– OECD considerations– OECD considerations

• Model Tax Convention• Articles 5 - 9

• Economic scaleSi t it & l– Size; assets, equity & sales

• Economic scope– Diversity of operations, FDI

[foreign direct investment][ g ]• Effective tax rate

– GAAP’s- financial disclosure -[SEC & PCAOB, FASB, IFRS f/k/a IAS]IFRS f/k/a IAS]

Standard Approaches• Economic study of transactions • – Risks, goods/services transferred

B fit i d t t• – Benefits received test • – No “netting” • – NO stewardship expenses • – Documentation is contemporaneous • – Adjusted in books/records at least

quarterly• – Basis of consistent allocation • – Impact on taxes and administration p• • CUP: comparable uncontrolled

price • • Cost plus • • Cost sharing Cost sharing • • Profit Split • • TNMM: Transactional Net Margin • • Resale Minus

S f h b d hi hi• Safe harbors and hierarchies

Transfer Pricing & CustomsTransfer Pricing & Customs• Key developments – as corporate profits continued to be heavily taxed,

th b d i i d b i i l ti d f t tthe burden is accompanied by increasing regulations and enforcement to maintain the tax base in the world’s largest economies.– Since 2003, more fiscal authorities have taken action on transfer pricing

requirements and access to documentation.q– Complexity of transfer pricing regulations increasing – Audits highly aggressive; both TP and Customs

• Customs under Tax departments; trend– Advanced pricing arrangements, what will that do for most MNC’s?

• Mitigation of transfer pricing adjustments under audit• Can be costly – more common in the US, Canada, UK & Australia

– Not considered purely a compliance exercise anymoreNot considered purely a compliance exercise anymore– Customs audits increasing; more resistance between Tax Authority and

Custom Authority. However, APA’s doesn’t ensure compliance with Customs. Ti i i TP ti C li t ti– Timing issues; TP corrections versus Compliance entry corrections. Retroactive pricing adjustments; an unacceptable risk?

Legal Authority – Profit repatriationd fState Administration of

Foreign Exchange [SAFE][SAFE]Under the current foreign exchange laws and regulations, an FIE could repatriate its profits through therepatriate its profits through the following approaches;

DividendsInterest, rentalsInterest, rentalsRoyaltiesTechnical service feesNon-technical service feesNon technical service feesSales commissionsR & D cost sharingReimbursementsReimbursementsExpatriate salaries

Documents and Procedures for Remittance of Profits, Dividends and Bonuses

Documents to be submitted to the Bank:1. Tax payment statement and tax return

2. Audited report of profits, dividends and bonuses of the current year

3. Resolution by board of directors for dividend and bonus distribution

4. Foreign exchange registration certificate of foreign-invested enterprise

5 C dit t d b ti fi5. Credit report prepared by an accounting firm

6. Other information requested by SAFE

7. For remittance of profits, dividends and bonuses from previous years, and audited report on the FIEs financial situation during the year in question should also be submitted to the g y qbank

Bank verifies authenticity of the documents:

Bank completes remittance procedures:Bank completes remittance procedures:1. Bank will mark ‘profits, dividends and bonuses remitted’ on the foreign exchange registration certificate and tax payment statement respectively and endorse with an official seal. The bank retain copies of the remittance on record.

International Trade – ChinaInternational Trade China The need to effectively manage the supply chain; no weak links!Duties are levied on goods imported into China based on a predefined and

published nomenclature per the Harmonized System. Customs duty is levied based on CIF [cost, insurance & freight] Transaction Price of the imported goods at the rate of duty specified in the PRC customs tariffimported goods at the rate of duty specified in the PRC customs tariff.

Since China’s WTO [world trade organization] accession, average duty has declined to ~ 9% and foreign invested companies may acquire import/export rights direct without having to trade through a 3rd party p / p g g g p yimport/export company.

China entered into preferential trading agreements with other Asian countries; i.e.Thailand, Malaysia & Singapore. Under the ASEAN China FTA, trade can t k l ith l t d ti i d C tifi t f ‘ f thtake place with lower custom duties imposed. Certificate of ‘no further processing’ is allowed via Hong Kong. Specific documentation required to the commodity, inspection and quarantine authority.

International TradeInternational Trade• International Trade implications

– Free Trade Zones• Free circulation – what does that mean?

– What about bonded equipment under evaluation?• Tax holidays and lowered ratesTax holidays and lowered rates

• ITAR – International Traffic in Arms Regulations [Export control]– License requirementsLicense requirements– Denied parties list– Security measurement

• Audit reviewAudit review– Internal audit – measure effectiveness and error rates– Class, value, quantity and statistical

International Trade – Customs & VAT

• Importation VAT-Importation VAT• VAT is applied to the importation and sale of tangible goods.• The standard VAT rate is 17% while certain goods are taxed at a lower

rate of 13%rate of 13%.• Exports are zero-rated and related input VAT; depending on the

category of goods, could be fully, partially, or non-refunded.• VAT is levied on the basis of value added to the taxable goods at each

stage of the supply chain.• To address overheating export growth, China has aggressively revised

VAT refund rates to manage the ballooning trade surplus. The result? Significant additional VAT leakage costs. Circular – Adjustment to g g jExport Rebate Rates on Certain Export Goods (Cai Shui [2007] No. 90).

VAT Impact - ChinaVAT Impact China• Overlooking the impact of VAT on your China importing project can lead to major complications.

Some examples:Some examples: • If you don’t know the VAT rebate amount, then you don’t really know your suppliers true costs and pricing. This can complicate negotiations and supplier comparisons. The supplier may be pocketing the VAT rebate without informing the buyer. • To further complicate the situation, VAT and product classification can be negotiated with the l l t b i i li l f i l ti th i A li t lllocal customs bureau, giving a supplier more leeway for manipulating the price. A supplier may tell you they are only getting a certain percentage back, when in reality they negotiated a classification that gives them a higher rebate. • Many suppliers lack import-export rights and proper VAT processing facilities. They are therefore forced to use third-party trading companies which inflate the price and complicate the

l ti hirelationship. • If the order is small, suppliers may find ways to fly under the tax radar and avoid paying the VAT, and thereby offer a ‘non-VAT price’. While a ‘no tax price’ may sound attractive at first, buyers can be unpleasantly surprised when:

(a)You buy direct from the factory (EXW) in China but find out later the goods can't be ( ) y y ( ) gexported because of a lack of tax documentation; or (b) The volume of business grows to a point that the supplier can’t avoid putting the tax payment on their books. So, while you are expecting the "standard" discount for your large order, out of the blue you get surprised with a price increase to cover a tax that now has to be paidbe paid.

VAT Rebate - ChinaVAT Rebate China• Comparison of terms:

To allow for pricing comparison of quotes coming out of China, you will find it advantageous to ask for the price in three ways:

• 1. EXW (ex-works/ex-factory)EXW means ownership of the goods transfers to the buyer at the factory’s door. This price does not include any taxes or shipping fees. The buyer or their representatives needs to organize customs clearance out of China. In practice, there are third parties that will arrange export of goods without tax paid by charging a one-time processing fee, which is usually a few hundred US dollars per container. So for small, one-off orders, it may be possible to buy at the EXW price level. It is highly recommend that you base your long-term budgeting on the FOB pricing.

• 2. FOB China portFOB, or freight on board, means the transfer of ownership takes place after the items have cleared outbound Chinese customs and are on the boat, ready to ship from a designated port (for example, FOB Shenzhen). For buyers new to China, FOB is a much more convenient way to purchase compared to EXW because the supplier is responsible for handling any VAT issues.compared to EXW because the supplier is responsible for handling any VAT issues.

• 3. EXW with tax receiptThis means the buyer or his representatives will need to organize the VAT rebate and customs clearance out of China on their own. This is not an easy task and not recommended for those who are new to China unless they have a trusted advisor who can walk them through the process.

• If you are consolidating orders among multiple suppliers in China, or buying in China for delivery t th l ti i Chi th d t di VAT i i ti F il t d i kto another location in China, then understanding VAT is an imperative. Failure to do so risks sacrificing a potential rebate.

• As a final point, while China VAT is a complex issue, simply asking your supplier to outline their VAT rebate rates and process is a big step in the right direction, and may shed some light on an often opaque part of importing from China.

International Trade Controls – [International Traffic in Arm Regulations] ITAR

The U.S. and other countries have special regulations for the import, export, and re-export of defense-related goods and services Products subject to these regulations include but are not limited to:related goods and services. Products subject to these regulations include but are not limited to:

• · TEMPEST products – National Security Agency [NSA] provides lists of commercially developed and produced TEMPEST telecommunications equipment, which NSA has certified under the auspices of the Certified TEMPEST Products Program. The lists are for use by government entities and their contractors to select products for processing classified information.

• · Products ruggedized for military use –harsh environments

• Simulation/war gaming software• · Simulation/war-gaming softwareAll imports, exports, and re-exports of military goods and services must have the appropriate

authorizations from the U.S. and other national governments. All transactions involving products, technical data, or services subject to regulations governing military

goods and services must be screened to ensure proper authorizations are in place prior to providing the product, data or service.

As part of the classification process for all products, software, and services specially designed for military or defense-related customers, special consideration should be given to determine if the items are subject to control under the U.S. Department of State ITAR regulations

These products are controlled by the U.S. under the International Traffic in Arms Regulations (ITAR).These products are controlled by the U.S. under the International Traffic in Arms Regulations (ITAR).The above is predicated upon legal requirements to ensure compliance with current governmental and

international trade regulations. Failure to meet legal requirements may result in delayed or impounded shipments, increased inspections and audits, increased cycle times, the loss of highly valued export and import trading privileges and government confidence, and/or civil or criminal penalties to include fines or imprisonmentpenalties to include fines or imprisonment.

International Trade Controls –C-TPAT

• [The Customs-Trade Partnership Against Terrorism] C-TPAT= Security & cooperation.

C-TPAT is a voluntary government-business initiative to build cooperative relationships that strengthen and improve overall international supply chain and U.S. border security. C-TPAT recognizes that U.S. Customs and Border Protection (CBP) can provide the highest level of cargo security only through close cooperation with the ultimate owners of the international supply chain such as importers, carriers, consolidators, licensed customs brokers, and pp y pmanufacturers. Through this initiative, CBP is asking businesses to ensure the integrity of their security practices and communicate and verify the security guidelines of their business partners within the supply chain.

Beyond these essential security benefits, CBP will offer benefits to certain certified C-TPAT member categories, including:

• A reduced number of CBP inspections (reduced border delay times)P i it i f CBP i ti (F t f th Li i f i ti h ibl )• Priority processing for CBP inspections. (Front of the Line processing for inspections when possible.)

• Assignment of a C-TPAT Supply Chain Security Specialist (SCSS) who will work with the company to validate and enhance security throughout the company’s international supply chain.

• Potential eligibility for CBP Importer Self-Assessment program (ISA) with an emphasis on self-policing, not CBP audits.

• Eligibility to attend C-TPAT supply chain security training seminars• Eligibility to attend C-TPAT supply chain security training seminars.CBP recognizes that a safe and secure supply chain is the most critical part of our work in keeping our country safe.

For this reason, CBP is seeking a strong anti-terrorism partnership with the trade community through C-TPAT. Trade partners will have a commitment to both trade security and trade compliance rooted in their business practices. CBP wants to work closely with companies whose good business practices ensure supply chain security and compliance with trade laws.

International Trade Controls -Transfer of Technology

• Technology (also called “Technical data”), may be tangible (such as operating l h ti f t i d t ) i t ibl ( hmanuals, schematics, manufacturing process documents), or intangible (such as

technical services or educational service courses). Technical data and the direct product of restricted technical data, is subject to U.S. and other national government export/re-export controls.

• A variety of export controls apply to technology transfer associated with products and services provided by a company. Any transfer of technical data, whether by physical shipment, surface mail, electronic mail, the Internet, the Intranet, oral or visual p , , , , ,demonstration, or other means may be considered an export or re-export for export control purposes. Given the global nature of research and development, manufacturing, assembly, procurement, and support functions, and the ease with which information can be transferred, it is incumbent upon a company to maintain p p yeffective control of the transfer of technology. These controls apply to transfers of technical data to customers, vendors, partners, consultants, and company employees.

China Customs – Valuation Ruling System AdoptedSystem Adopted

• Huangpu Customs has introduced the customs valuation ruling system as of 1 July 2006. An importer including FICEs (foreign invested commercial enterprises) can obtain endorsement on the import value from Customs prior to shipment to reduce the uncertainties with respect tothe import value from Customs prior to shipment to reduce the uncertainties with respect to customs value. This reduces "hold up" of cargoes and clearance delay, a tremendous issue to many multinational companies.

• Benefits1. Proactive test on the new transfer pricing policy from customs perspective

2. Less uncertainty

3. Quick customs clearance

4. No deposit required for customs clearance

5 Establishment of good work relationship with customs5. Establishment of good work relationship with customs

6. Reduced risks of potential customs audit on import value• Eligibility1. Any importer ranking "A" or "B"

2 No non-compliance issues were identified by customs in the past six months2. No non-compliance issues were identified by customs in the past six months•• Requirements1. Transactions over US$200,000 (partial shipment is allowed);

2. Import price can be determined at the time of application and related documents can be provided to support the import price; or

3. The price of identical/similar goods can be found in public.

International Trade – Foreign C P i ACorrupt Practice Act

• The US FCPA prohibits both United States and foreign corporations and nationals from offering or paying, or authorizing the offer or payment, of anything of value to a foreign government official, foreign political party, party official, or candidate for foreign public office, or to an official of a public international p y, p y , g p , porganization in order to obtain or retain business.

– Outline & Terms:o The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality

thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

o A company cannot engage in activities that influence any act or decision of such foreign official, party or candidate in his official capacity;p y g g y g , p y p y;o inducing such foreign official, party or candidate to do or omit to do any act in violation of the lawful duty of such officialo inducing such foreign official, party or candidate to use his influence with a foreign government or instrumentality thereof to affect or

influence any act or decision of such government or instrumentality

o Routine Governmental Action; acceptable practice:o The term “routine governmental action” does not include any decision by a foreign official whether, or on what terms, to award new g y y g , ,

business to or to continue business with a particular party, or any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to or continue business with a particular party.

• The term "routine governmental action" means only an action which is ordinarily and commonly performed by a foreign official in:o obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;o processing governmental papers, such as visas and work order;o providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related

to transit of goods across country;o providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from

deterioration; oro actions of a similar nature

In addition, the US FCPA requires companies to maintain and retain books and records which, in reasonable detail, accurately reflect the disposition of company assets and to devise and maintain a system of internal accounting controls sufficient to reasonably assure thatdisposition of company assets and to devise and maintain a system of internal accounting controls sufficient to reasonably assure that transactions are authorized, recorded accurately, and periodically reviewed.

International Case Study – Roundtable Di iDiscussion

US MN Principal

3 d P t C t t Mf

Japan Supplier

WFOE/FICE3rd Party Contract Mfg– Location- Science-based Industrial Park

Taiwan

d3rd Party Contract Mfg -Location - Shenzhen

China

US High Tech MNC has purchased 6 units of capital equipment from its custom supplierUS High Tech MNC has purchased 6 units of capital equipment from its custom supplier in Japan. The company intends on shipping the capital equipment units to its 3rd party contract manufacturers in China and Taiwan to use in their exclusive manufacturing process.

Each contract manufacturer does not have the funds to purchase the capital equipmentEach contract manufacturer does not have the funds to purchase the capital equipment. Situation – How does the High Tech MNC transact the capital equipment to its contract manufacturers?

•Demo

•Operating LeaseOperating Lease

•Standard Import

What are the risks associated with Duty, VAT, TP and income tax matters?

International Case StudyName of Enterprise AnyCo (Shenzhen) Co., Ltd.

Approval Certificate No.

Shen Wue Zi Yue Shen Fu Wai Zi Zi [2007] No. 0222

Import and Export Enterprise Code 4455559554858

R i t d Add S it X A R d F ti Di t i t Sh hRegistered Address Suite X Any Road, Futian District, Shenzhen

Total Investment USD 225,000(applying for increase to USD 875,000) Registered Capital USD 225,000

(applying for increase to USD 875,000)

Business Income of Last Year RMB 4,500,000

Original Business Scope

To provide technology and consulting service to the Chinese manufacturers and clients; to provide quality control service for coreproduct and related products which are made in China and the know-how of which is owned by the company.

Business Scope after change

To provide technology and consulting service to both Chinese and foreign manufacturers and clients; to provide quality controlservice for core product and related products which are made in China and the know-how of which is owned by the company; toengage in importing and exporting of equipments and instruments for manufacture of core product; to engage in wholesale,commission-based agency (except for auction), importing and exporting and related business relating to core product and their

l i lrelevant raw materials.

Will the distribution income of the enterprise exceed 50% of the totalbusiness income after adding distribution business scope?

○是Yes ○否No Industry Code

Thank You!Thank You!• Janice Leahy y• David Dahn

Main +978-749-9900

Prepare for Successwww.dahnleahy.com