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New York, June 24, 2005 — Tax authorities of China and Japan have negotiated the first-ever advance pricing agreement (APA) for a major Japanese electronics company. The historic agreement will likely make it easier for multinational companies from other countries to invest in China, while reducing the risk of double taxation. This development could contribute to additional foreign investment into China from multinational companies, and will be particularly attractive to the many technology companies looking to expand in the region.

This agreement demonstrates China's State Administration of Taxation's new confidence in APAs and the fact that both tax authorities reached agreement so quickly, within 12 months. This reflects their flexibility and cooperation during negotiations and commitment to this process.

This agreement sends a clear signal to high tech and other multinational corporations with investments in China that they can seek certainty in their tax levels and rates by amicably dealing with complex and potentially controversial issues using the APA program. Technology companies, for which intellectual property and other intangibles are key determinants of success, are likely to be principal beneficiaries of the new openness in China to APAs, as tax planning around the deployment of intangibles in the tech sector has historically been subject to considerable controversy and uncertainty.

"This will be a boon to multinational companies seeking to streamline the regulatory burden and operate more efficiently in China," commented John Ruffolo, a Partner with Deloitte & Touche LLP in Canada and tax leader of the Deloitte Touche Tohmatsu (DTT) Technology, Media & Telecommunications industry practice. "Technology companies have felt especially vulnerable in the past in their dealings with foreign tax authorities, and as a result have been somewhat reluctant to undertake substantial investments in countries with uncertain regulatory environments. Overall, the APA process should result in improved efficiency for both compliance and examination, as well as certainty for both the taxpayer and the government, via a transparent process."

"The decision has wide ranging tax implications for multinationals doing business in China," explained Bill Dodge, a Partner with Deloitte Tax LLP in the U.S. and leader of the DTT Transfer Pricing practice, which helped negotiate the agreement. "For the first time, multinationals have the option to negotiate certain tax arrangements up to five years in advance, rather than separately determining and defending each year."

Deloitte Touche Tohmatsu, through its member firms, has served as international tax advisor to this Japanese electronics company for many years, and provided assistance supporting their decision to apply for this historic APA. They provided all the necessary technical assistance and helped the company communicate effectively with China's State Administration of Taxation and Japan's National Tax Agency at all stages of the negotiation.

"The decision demonstrates that the Chinese taxation authorities continue to become more transparent in taxation matters, and are willing to follow generally accepted principles from other countries," added Dodge. "Multinational companies now have the ability to operate more efficiently in China, with easier tax planning, reduced preparation or negotiation costs and less risk."

Background
Transfer pricing refers to the allocation of profits, for tax purposes, across parts of a multinational company. The tax laws of many countries require that companies establish an "arm's length" price for a product or service. For example, if a U.S.-based company purchases a component from one of its divisions in China, the price must be similar to a "omparable" price that another company in the United States would have paid for the same component. Generally a company has to calculate the relevant "arm's length" price for each country involved in the transaction on an annual basis.

An advance pricing agreement (APA) allows a company to negotiate the price of a product or service associated with transfer pricing over a period up to five years, rather than renegotiating at the end of each year. This helps companies plan their future tax liabilities, reduce the risk of noncompliance, and minimize the time and cost of determining and defending on a yearly basis.

Advance pricing agreements are a relatively new area of tax planning, which allow organizations, especially companies in the technology sector, to address the risk of double taxation, the time involved in annual calculations, and the overall costs of preparing taxation planning and returns.

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