Transcript
Tax Case Study Inter Company Service Agreement Background
A manufacturing WFOE is owned by a US parent company was established in Shanghai. And due to lack of product experience, skills and market contact, the China WFOE required its US parent company to provide certain services. The WFOE will pay the relevant service fee to the parent company. However, before the service begins, there should be an inter-company service agreement in place for the services to be provided. The WFOE requested SBA Stone Forest for assistance to draft such inter-company service agreement.
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Information Collection To start drafting the service agreement, we first collected the relevant information, such as the starting date of the service, the industry of the WFOE, the services details to be provided by the US company (e.g. design, marketing, research & development) are whether there is any employee assignment for the service provision and etc. Selection of Cost Plus Method and its Mark Up Rate According to Guo Shui Fa [2009] No. 2, the inter-company transaction should comply with the arm's length principle. In this regard, we have selected the cost-plus method as the proper transfer pricing method to generate the inter-company service agreement according to the industry practice. We also researched for the applicable mark-up rate range according to its industry and also consulted with the in-charge tax bureau under no name basis for the reasonableness of the said range. Withholding Tax Exposure Since there are service fees to be paid to US, the China WFOE should act as the tax withholding agent and pay relevant tax such as business tax, additional surcharges, and enterprise income tax to the in-charge
tax bureau in China before the service fee is paid out. And we have reminded our client of the tax obligations and also included such wording in our drafted service agreement.
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