Tax Case Study Inter Company Service Agreement

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.
Professional
Services from
SBA Stone Forest
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.
Tax Services by
SBA Stone Forest
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Specific tax issue settlement
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