2015 KPMG EMA Tax Summit

New Regulations New ApproachesNew Norms

Cheng ChiHead of China & Hong Kong SARGlobal Transfer Pricing Services

3© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Revised transfer pricing regulations

Challenging Post-BEPS Environment

Effective period and retroactivity

Divergence or

consistency

Specific and overt wording

Source: Public consultation draft of SAT Circular on Implementation Measures for Special Tax Adjustments issued on September 17, 2015

4© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

China – BEPS Integration (Draft Regulations for Public Consultation)

• DEMPE vs. DEMPEP• Control vs.

Performance• Important functions• Significant vs. unique

and valuable intangibles

Intangibles

• Direct and indirect economic benefit (6 tests) + OECD benefit test

• No safe harbour for low value adding services

Services

Effective 1 Jan 2016 – applicable to cases opened but not concluded on 1 Jan 2016!

5© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

China – BEPS Integration (Draft Regulations for Public Consultation)

• No mention of LSAs being potentially being passed to end-customers

• Could invalidate one-sided methods due to lack of local comparables and/or reliable adjustments

Location specific advantages

• Value Chain Contribution Method - Applied when comparability information is difficult to obtain (intangibles, LSAs, lack of local comps)

• Valuation methods introduced for intangibles and equity transfers

New methods

Effective 1 Jan 2016 – applicable to cases opened but not concluded on 1 Jan 2016!

6© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

China – BEPS Integration (Draft Regulations for Public Consultation)

• LF to include “Value Chain Analysis”

• Special Documentation on Services, CSAs and Thin Cap

Documentation

• Denial of tax deduction of payments to entities with no substance

• Toll manufacturing• Reverse TNMM• Recharacterisation• De-registration

Special tax adjustments

• Priority given to applications with thorough value chain analysis and LSA considerations

• Adjustment to median

APAs

Effective 1 Jan 2016 – applicable to cases opened but not concluded on 1 Jan 2016!

7© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

China – BEPS Integration (Draft Regulations for Public Consultation)

• Thin cap – earning stripping or group limitation rules not introduced

• CFC• GAAR – purpose-focused test

Other SAARs and GAAR

Effective 1 Jan 2016 – applicable to cases opened but not concluded on 1 Jan 2016!

8© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Top issues for MNEs

PE

Legacy issues

Compliance challengesIntangibles

Contract R&D

IP Holding Structure

Agency PE Anti-fragmentation rules Profit attribution mechanism?

Deductibility questionable?

Funding + “rubber stamping” no longer sustainable

Unanticipated risks for legacy tax planning (e.g. global profits historically concentrated in low-tax, low-substance jurisdictions)

Can cost plus be sustained?

Divergent views leading to tax frictions (double taxation)

Significantly tailored and expanded LF requirements

Special Documentation

9© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Transfer pricing audit statistics

2006 2007 2008 2009 2010 2011 2012 2013 2014Adjustment Amount

(RMB million) 679 987 1,240 2,090 2,310 2,400 4,600 4,594 7,900

Cases Concluded 177 173 152 167 178 207 175 211 257

0

50

100

150

200

250

300

01,0002,0003,0004,0005,0006,0007,0008,0009,000

Adjustment Amount (RMB million) Cases Concluded

Tax authorities are increasingly focusing on cases with the largest exposures.

Number of cases concluded in 2014257

Total Adjustment Amount in RMB Billion7.90

30.68 Ave. Adjustment Amount, RMB Million

20Number of Cases with

Adjustment Amount exceeding RMB 100 Million

83Number of Cases with

Adjustment Amount exceeding RMB 10 million

Source: KPMG Intelligence (Estimation)

10© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Transfer pricing self-adjustments statistics

Additional tax revenue collected from self-adjustments grew significantly over the past five years.Circular 54 [2014] formalises self-adjustments.

7.1

20.828.3

37.7 39.6

0

10

20

30

40

50

2010 2011 2012 2013 2014

Additional taxes from self-adjustments

1,562 self-adjustments in 2014. Beijing, Jiangsu, Shanghai, Guangdong, Shenzhen and Anhui are the most “active”.

Source: KPMG Intelligence (Estimation)

11© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

1.Risk review

and assessment

on current

model

Approach and Recommendation (1)

What KPMG can help

• TP compliance review• TP risk assessment

Review the organization structure of the group entities and identify any entity lack of substance or with mismatched function/risk/asset profile

Review the RPTs within the group from the perspectives of transaction type, flow, profitability and value chain contribution related to the involving parties

Conduct risk assessment on the RPTs in the group and focus on the value chain and transactions related to the PRC entities

12© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

2.Re-planning

Approach and Recommendation (2)

What KPMG can help

• M&A advisory• TP planning & supporting

document preparation

Analyze the necessity of value chain transformation and TP policy optimization

Feasibility study on the available options

Regularly review the implementation of the pricing policy and assess the necessity of any adjustment

13© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

3.Compliance

Approach and Recommendation (3)

What KPMG can help

• TP documentation • TP supporting document

preparation/review

Assess the resources for compliance work, then review and improve the relevant compliance procedures

Identify better disclosure position

Prepare and retain sufficient supporting documents and materials in detail

14© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm hasany authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

4.Dispute

Resolution

Approach and Recommendation (4)

What KPMG can help

• TP training• TP dispute resolution

Pre-audit: identify the risks and prepare the appropriate supporting documents

In audit: response to the tax authorities’ quires and form TP position with solid technical ground

Post-audit: continuously monitor the compliance performance

Thank you

Presentation by Cheng Chi

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© 2015 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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