Belasting en regelgevingskwesties

Door Inkeping Debnam & George Svinos, KPMG

Het proces om luxegoederen in China in te voeren te verdelen en te verkopen heft verdere uitdagingen voor bedrijven, met inbegrip van een aantal moeilijke vragen betreffende belastingsbehandeling, douanerechten, logistiek en de overdracht van intellectuele eigendom op.

De douanerechten, de de invoerBTW en de consumptiebelasting kunnen allen op luxegoederen worden aangerekend die in China worden ingevoerd. De capaciteit van merken om hun goederen bij dramatische premies omhoog te merken kan ook moeilijk blijken om aan belastingautoriteiten te verklaren wanneer de tijd komt om inkomstenbelastingswinst in te dienen. De bedrijven veroorzakend of uitwisselend luxepunten moeten begrijpen hoe te om onnodige of overlappende last van belasting en andere heffingen te vermijden. Bijvoorbeeld, zouden de BTW en de vennootschapsbelasting in theorie wederzijds exclusief moeten zijn, aangezien allebei omzetbelastingen zijn.

Douane

Één van de eerste kwesties die een importeur van luxegoederen onder ogen zien betreft douanerechten. De importeurs betalen typisch douanerechten op de verklaarde de invoerwaarde, maar zouden bedachtzaam moeten zijn dat als er een afzonderlijke royaltyovereenkomst is en de royaltybetaling met de ingevoerde goederen wordt verbonden, zij kunnen worden vereist om plicht op de royalty ook te betalen. Indien bevestigd dat deze royalty aan douanerechten onderworpen zou moeten zijn, deze royalty als deel van de belastbare waarde zal worden opgenomen en zal belast worden aan het tarief van toepassing op de ingevoerde goederen.

Een tweede kwestie is douanewaardevaststelling. De ambtenaren van de douane leiden hun eigen gegevensbestand van het tarief informatie dat op het afgelopen douane indienen wordt gebaseerd. The authorities may base their considerations on this database before they turn to the importer with a pricing enquiry.

It is therefore highly advisable for importers to file customs declarations based on the genuine terms and conditions of the transaction and to make necessary adjustments to the transaction value, according to the customs valuation code. Any discussion or uncertainty over valuation could entail delays or even cause shipments to be withheld.

A less common consideration for luxury brands, but one which will affect certain goods, is classification. Customs may wish to classify certain goods which arrive as component parts as finished goods, entailing different dutiable treatment. One way to avoid this uncertainty, which is also encouraged by the Customs authority, is to reach an Advance Classification Ruling on the goods to be imported. This includes filing an application, and providing samples and specification information on materials used and processing methods involved.

In reaching an agreement with Customs, such a classification would be good for a period of two years and can then be renewed provided major changes have not been made to the goods under discussion. A similar arrangement called Advance Customs Valuation has also been introduced to reduce the uncertainty on customs valuation upon importation. But this is usually for large amount recurrent imports.

Finally, Customs recently published a list of goods which cannot be imported under processing trade, including exports under toll manufacturing arrangements and buy-sell arrangements. It means that customs duty and import VAT (import taxes) would be payable upon importation of these goods, even if they are imported for export use. This recent change in policy will increase the cost of production for those operations which have been importing these materials as bonded goods under processing trade arrangements in the past. These operations may have to consider varying their mode of operation in China to reduce their tax burdens.

Special zones

Free Trade Zones (FTZs) and Bonded Logistics Parks (BLPs) are located in major coastal cities such as Dalian, Shanghai, Shenzhen, and Guangzhou and have been used to plan the distribution of imported goods within China. As these special tariff areas are regarded as outside of China for customs purposes, goods can generally be stored here and not subject to import taxes until they are shipped into China’s domestic market for free circulation. In such cases, the warehouses inside these zones take on a role as regional distribution centres. Warehousing and distribution activities are allowed but substantial manufacturing activities are not encouraged.

On the other hand, if the goods need to undergo final processing procedures for export sales after entering China, an Export Processing Zone (EPZ) could be a good option to setup a processing facility, especially if some of the final products will again be shipped out of China for international sales.

VAT considerations

China’s VAT regime requires luxury brand companies to carefully consider the turnover tax consequences of their activities. First and foremost, a company’s tax requirements will depend on whether it registers as a general VAT tax payer or a small-scale VAT tax payer. This classification will determine the way it can compute VAT payments and its eligibility to procure and issue VAT invoices.

Retailers and wholesalers typically require anticipated annual sales of RMB 1.8 million, a fixed place of operation and procession of physical goods in order to apply for general VAT tax payer status. An applicant company must be able to prove that it has a reliable accounting system, good internal controls and the capability to correctly compute its VAT burden. The quality of the management/staff and the effectiveness of the system on tax accounting are key areas for inspection.

It is also worth pointing out that exports of goods from China will be subject to a positive VAT charge, unless the VAT export refund rate for the export products is 17 percent. The lower the VAT export refund rate, the higher is the exporter’s VAT burden.

Transfer pricing

China’s enforcement of transfer pricing regulations is a growing area of concern for companies involved in transfers of IP and other intangible assets. A key concern for companies is how to compensate the brand or IP owner adequately and fairly. The tax authorities are presently very concerned by the tax implications of inbound IP transfer and are particularly aware how far prices can be marked up. This is especially evident when they see the price luxury brands can charge compared to similar counterfeited goods.

Luxury brands may not yet be a sufficiently profitable business to have fully caught the attention of China’s tax authorities. Indeed, after profits have been allocated to other steps in the value chain, there may be little left to allocate to IP. Companies opening up new luxury market segments in China can face heavy losses early on, when marketing and advertising costs are high. Even brands which are well known overseas may not generate premium profits in China in a reasonable time. The tax authorities often use this as areas on for doubting any value attributed to the IP. In their view, if the IP were valuable, it would generate profit– how can a company with poor financial performance pay royalties on an apparently unsuccessful business?

Ironically, the time when the tax authorities might deem the company’s IP worthless is also the time when it is most at risk from competitors. Subsequent market entrants can not only learn from the first-mover’s mistakes, but also piggyback of the brand-building that is being put in place, exacerbating IP leakage.

Luxury companies can therefore face many challenges in explaining their pricing policies. While certain companies (for example an importer and distributor) see each other as arm’s length partners, they may find it difficult to explain and verify that relationship to the authorities. Also, in a market where brand awareness is low, a premium value may be harder to charge or to justify for tax purposes. By aligning its transfer pricing policy with IP strategy, a company will find it easier to defend its tax position in front of the authorities.

A Hong Kong perspective

It has become a common practice for international brands to establish a distribution centre in Hong Kong, due to the territory’s high quality logistics infrastructure and the existence of a sizeable domestic market of its own. However such a strategy throws up its own tax and regulatory considerations. If the purchase price or other fees attributable to the goods are too high, it may be argued that the amount paid is incurred for a purpose other than for the derivation of assessable profits.

It is usual for retailers in Hong Kong to pay lease incentives (in particular for prime retail leasing locations) and to incur expenditure on advertising signage. Considerations should be given to the determination of these expenses as being revenue or capital in nature so as to avoid tax-inefficiency.

In addition, staff may be hired by Hong Kong companies to conduct sourcing or selling activities regionally. The activities of these staff may create a taxable presence and/or tax reporting obligations for the Hong Kong companies in the overseas jurisdictions.

KPMG’s experienced professionals can assist companies to manage a range of tax and Customs considerations relating to the importation, production, marketing and distribution of luxury goods in China.

Nick Debnam & George Svinos, KPMG

This is the last part of a KPMG Retail Report.
Read Part I, Part II, Part III and Part IV