Aggregating Service Days under Treaties for Foreign Corporate Tax Risk
Aggregating corporate service days across connected contracts under tax treaties requires tracking immigration timestamps to manage permanent establishment exposure.
Split Scope Pricing
Meaning
Commercial structures for international supply often divide the value of offshore goods from the value of onshore technical labor. This split scope pricing structure is used to minimize the tax exposure of foreign contractors working on large scale infrastructure or industrial projects in China. By dividing the contract into two distinct parts, the parties can ensure that the offshore portion is not subject to local corporate income tax.
Value Allocation
The offshore contract covers the design and manufacturing of equipment outside the borders of the mainland. Using split scope pricing, the title to the goods passes at the port of departure or on the high seas. This allows the foreign seller to avoid value added tax on the equipment sale while the Chinese buyer handles the import duties and local taxes upon arrival.
Tax Liability
The onshore portion of the project covers installation and training performed within the country. Under split scope pricing, this part of the agreement is fully taxable in China and requires the foreign entity to register for tax or use a local subsidiary. Tax officials scrutinize the price ratio between the two contracts to ensure that the value of the onshore services has not been artificially lowered to hide taxable profits.
Substantiation Requirement
Evidence of the physical separation of activities must be maintained to defend the contract structure during an audit. The split scope pricing model requires separate invoices and independent project management for each half of the work. If the tax bureau determines that the two contracts are inseparable in practice, they will treat the entire project as a single taxable event and assess tax on the total contract value.
This risk is highest when the same staff members move between the offshore and onshore tasks without clear boundaries in their employment contracts or time sheets. Detailed logs of work locations and technical specifications are the primary tools used to prove that the offshore design was a separate commercial deliverable from the onshore assembly.