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 SBA Stone Forest Corporate Advisory Company offers the following Tax Advisory Services: Corporate tax planning Advisory on income repatriation Transfer pricing advisory Tax due diligence Tax SWAT Tax advisory retainer service Annual Corporate Tax Assessment IIT advisory IIT planning IIT review and back filing Annual IIT Assessment Employment contract advisory Specific tax issue settlement As part of our client service, SBA Stone Forest Corporate Advisory (Shanghai) Co., Ltd. continuously strives to furnish you with information that is of interest to you. In the meantime, if you require any clarifications, please do not hesitate to contact our following client service professionals: Ching Mia Kuang Managing Partner Tel: (021)6270 2215-128 Email: [email protected] Jane Shi Director, BD / Finance & Admin Tel: (021)6270 2215-222 Email: [email protected] Emily Yao Senior Manager, Tax Advisory Tel: (021)6270 2215-118 Email: [email protected] SBA Stone Forest has the Following Qualifications/Accreditations: 1. Qualified Entity Incorporation Agency Company ie. able to directly submit client’s application documents to the authorities for entity incorporation. 2. Qualified Accounting, Book-keeping and Related Accounting Services Company, which is certified by Shanghai Finance Bureau. 3. Qualified Translation Services Company ie. capable to carry out professional business document translation and business interpretation as required by government departments. 4. SAS70 Certification ie. SBASF has been audited by the US CPA Firm for Accounting/Tax Compliance Services & Payroll/HR Services. SBASF received SAS70 Type II (USA) Certification. We are SAS70 compliant and capable to provide services to US public companies and their subsidiaries. For further information, please visit our website: www.sbasf.com Copyright This article and all its components (including images, audio and text) are copyright held by SBA Stone Forest Corporate Advisory (Shanghai) Co., Ltd. No part may be reproduced, copied, transmitted in any form or by any means without the written permission of SBA Stone Forest Corporate Advisory (Shanghai) Co., Ltd. Disclaimer While utmost care has been taken to ensure accuracy with the relevant laws at the time of writing, no person should rely on the contents on this article without first obtaining advice from a qualified professional person. This article is issued on the terms and understanding that (1) the author is not responsible for the results of any actions taken on the basis of information in this article, nor for any error in or omission from this article; and (2) author expressly disclaims all and any liability and responsibility to any person, whether a reader of this publication, in respect of anything, and of the consequences of anything, done, or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.