Meaning
Special tax investigation processes target the pricing and substance of payments made to foreign entities for intellectual property rights. The royalty remittance audit is conducted to ensure that licensing fees are not used as a hidden method for profit shifting. Tax bureaus examine the technology transfer contracts and the value of the assets being licensed.
This audit applies to all domestic firms paying fees to overseas parents or third party owners.
Transfer Price
Authorities compare the license rate against the market price for similar technology in the same industry. The royalty remittance audit focuses on whether the price was set at arm’s length. If the rate is deemed too high, the tax office may recharacterize the payment as a dividend and deny the expense deduction.
Beneficial Use
Companies must prove that the licensed property is actually utilized in their production or service operations. The royalty remittance audit requires evidence of the technical support or brand marketing provided by the overseas owner. If the local entity is already performing these functions internally, the fee is likely to be challenged.
Withholding Accuracy
Auditors verify that the correct amount of tax was withheld and paid to the local treasury. The royalty remittance audit checks the application of double tax treaties to ensure the company is not claiming an unauthorized lower rate. Penalties for underpayment include back taxes and daily interest charges.
