A Study Of Legal Issues Of The Intangible Asset Transfer Pricing

Transfer pricing,as one of the most important issues in international tax law, has drawn much attention in recent years. The promulgation of the new "People's Republic of China Enterprise Income Tax Law" separate a chapter to "special tax adjustments",establish the arm's length principles as the principles of intangible assets transfer pricing , introduce the /profits split method and cost-sharing arrangements,and are basically in line with international tradition of transfer pricing of intangible assets. In the legal level,China has basically established a system of transfer pricing of intangible assets. However,compared with physical assets transfer pricing,intangible asset transfer pricing issues are more difficult in theory and practice. It can be seen from China's tax practice that there are still a lot of problems in intangible assets transfer pricing,therefore,there are special needs to analyze and study the international relevant rules for reference. In this paper,the important meanings of transfer definition is expounded in the introduction part,on which the whole thesis is opened out.The first chapter makes a systematic outline about transfer pricing issues. Intangible assets are often unique,lack of comparability. The traditional methods of adjustment,including the comparable uncontrolled price method,resale price method,cost-plus method,however for transfer pricing of intangible assets,seemed more and more helpless. This is the non-applicability of traditional transfer pricing adjustment methods,the core of which is compared price,to the transfer pricing of the intangible assets. With the rising proportion of intangible assets in the business activities,the United States and the OECD put forward the transactional profit methods based on profit and at the same time requiring a certain degree of comparability of trading. Transactional profit methods does not directly depend on independent businesses'close comparable transactions,even in the absence of comparable transactions , Transactional profit methods can also be applied. Transactional profit methods include comparable profits method,profit split method,the transactional net margin method. Comparable profits method is advocated by the United States,but was opposed by all the member countries of OECD. Profit split method and the net profit trade method are two profit methods stipulated by OECD. In particular,the profit split method has become the world's most popular adjustment method of intangible assets transfer pricing. Profit split method is divided into comparable profit split method and the residual profit split method,they better solve the issue of transfer pricing of intangible assets. China's new corporate income tax law also affirmed the advantage of profit split method in intangible assets transfer pricing. The second chapter discusses the basic issues of intangible assets transfer pricing. In terms of the principle transfer pricing followed,OECD adopted the arm's length principle,while the United States adopted the principle of arm's length principle and the best method principle. U.S. tax authorities believe that within multinational corporations transfer pricing should be in line with the arm's length principle,or it should be adjusted. There is no priorities of adjusting method,but in the choice of, the best method principle should be used,and allow taxpayers to use different methods to choose the best method which can reflect the arm's length principle. OECD is trying to strictly follow the arm's length principle,in particular,provides priorities of adjusting method. From the comparison, we can see that the best method principle United States followed is easier to realize the essential fairness. Therefore, China's new corporate income tax law also eliminated priorities of adjusting method.Multinational ownership of intangible assets is also one of the issues of transfer pricing. The ownership of intangible assets has the distinction of legal ownership and economic ownership as a subdivision. Legal ownership refers to the legally protecting of rights,mainly in the standard of form which is embodied in that the patent trademark and copyright need to be registered in accordance with the law in order to be protected by law. Economic ownership is a substantive issue; it involves the cost of the development of intangible assets major holders of risk. OECD attributed the profit to the major business economic risks involved, which means it is based on economic ownership. The ownership forms of intangible assets that transnational corporations adopted include centralized intangible assets ownership,distributed intangible assets ownership,and a geographic or regional distributed ownership . Research on the form of ownership of intangible assets will help the tax authorities have a clear understanding of the intangible assets issue and achieve a better regulation of intangible transfer pricing.The cost sharing arrangements involve the joint development of intangible assets,and the participants signed an agreement to achieve cost-sharing of the intangible assets. The basic elements of cost-sharing arrangements include the application of normal trading principle to the cost-sharing arrangements in order to carry out balance payment and buy-in payment,the distribution method of the cost and risk of the participants of cost-sharing arrangements,the arrangement,withdrawal or the termination of cost-sharing arrangement procedures,the tax consequences if cost-sharing are not carried out in accordance with the arm's length principle, companies'obligations in cost-sharing arrangements. In February 2006,the U.S. Treasury Department pointed out that there are tax-loopholes in the cost-sharing arrangements and it has been making effort to prevent the abuse of tax avoidance. In September 2007,the Internal Revenue Service(IRS) put forward two paradigms of buy-in payment about latest comments of the cost-sharing arrangements,that is,initial buy-in and subsequent acquisition buy-in, pointing out that the income method is the best method to determine the initial buy-in payment,and the acquisition price method is the best method to determine the subsequent acquisition buy-in payment. China's new Enterprise Income Tax Law also introduced cost-sharing arrangements. From the United States'existing problems and the latest developments in cost-sharing arrangements,we can see that they are still many problems,such as in the areas of cost-sharing basis,document preparation,buy-in payment,balance payment and regular adjustment of the system and so on,so our country still has to make active research.Advance Pricing Arrangements (APA) system make clear the transfer pricing methods in advance,and the agreement reached have binding powers for the both parties. This is conducive for the tax authorities to accurately grasp the operation of the taxpayers,so an effective surveillance of the taxpayers on the transfer pricing conduct can be made. For the taxpayers,it also reduced uncertainty of the tax treatment,which is conducive to establish normal and reasonable business expectation and carry out effective decision-making. APA also has some shortcomings such as high-cost of contracting, a short valid period, low efficiency, and the potential leak of confidential information of multinational companies therefore we also need to simplify procedures and improve the system. At the same time,we can see that the APA can not solve the real problem of pricing in the evaluation of the use of advance pricing agreement of intangible assets transfer pricing. But APA might be an effective means of reducing the tax authorities'inspection of intangible assets transfer pricing.In chapter three,the tax system of China's intangible assets transfer pricing is studied. China's transfer pricing tax system has gone through a process of form,from the special administrative region Law to the national legislation,from the simple to the comprehensive content and has reflected the process of China's reform and opening up and economic development. China's transfer pricing tax system mainly focuses on the chapter of new Enterprise Income Tax Law "special tax adjustment". The new Enterprise Income Tax Law conforms to international standards in terms of transfer pricing area principles,using international principles and methods. However, China's intangible asset transfer pricing tax system still has some problems that should be gradually improved in the following areas: In view of the special nature and complexity of intangible assets,special laws and regulations about intangible assets transfer pricing tax system should be made. Referring to the detailed explanations in Articles 482 of "internal revenue code" of the U.S.A with the explanation of actual cases; introduce the definition of "a new type of intangible assets",and make an expansion of the definition of China's intangible assets; introduce "normal transaction Domain concept". Because transfer pricing is not an exact science,in many cases,the use of one or more of the adjustment method will produce a data domain,and the data within the domain has the same reliability,if the controlled transactions (such as price or profit) fell in the data domain,you do not need to do any of the controlled transaction adjustment,which makes transfer pricing adjustments more scientific; intangible assets after the introduce a system of the subsequent adjustment system of intangible assets,transfer pricing of intangible assets included the two factors of the cost of development and profitability. The determination of profitability,to a large extent,is an estimation,therefore the subsequent adjustment system of intangible assets is a repair measure of the transfer pricing; The APA system we use now is an amendment of the "related business enterprises APA implementation of the rules (for trial implementation)" issued in 2004 by the Administration of Taxation. In the context of the new enterprise income tax, it is bound to amend the rules accordingly, distinguishing between different enterprises,developing of simplified procedures for APA,and meeting the needs of SMEs; strengthen international exchange of information in terms of collection and management of intangible assets transfer pricing tax; because the scale of transfer pricing base on economic data to a large extent, the establishment and improvement of China's transfer pricing information database can better adjust to the transfer pricing; in terms of body setup,we should set up transfer pricing department at the State Administration of Taxation,guiding the work of the country's transfer pricing; try the method of "dilemma of high and low",requiring one side or both sides of the associated business to declare the price truthfully,if the tax authorities hold that the seller's quotation is too low,he has the right to designate the seller to sell to non-affiliated enterprises at that price. If the tax authorities hold that the buyer's quotation is too high, he has the right to order him to purchase related products from the non-affiliated enterprises. In this way,the price is neither too low nor too high and this can be used as the transitional measures to the final implementation of APA.Intangible asset transfer pricing is a new question in China and needs learning and research. We should constantly improve our theoretical and practical level in order to prevent tax avoidance by using multinational transfer pricing,and thus better protect our country's tax base as well as taxpayers'legal rights.