Navigating Outbound Technology Licensing Tax Requirements in China
Outbound technology royalty remittances from China require MOFCOM contract registration, 10 percent withholding tax clearance, and SAFE bank verification.
Transfer Pricing DEMPE Analysis
Meaning
Functional assessment of how entities contribute to the development, enhancement, maintenance, protection, and exploitation of intellectual property ensures that tax liabilities align with value creation. The transfer pricing dempe analysis is a requirement for multinational enterprises to justify the allocation of profits among different jurisdictions. It focuses on which entity actually performs the core functions and assumes the risks associated with the intangible assets rather than who holds the legal title.
Intangible Valuation
Traditional methods of pricing often failed to capture the complexity of modern intellectual property management. Using the transfer pricing dempe analysis allows tax authorities to look past the legal ownership recorded in a contract. The analysis identifies the personnel who make the strategic decisions and the assets used to generate the intangible value.
Profit Attribution
Income follows the functions performed and the risks assumed by each party. A transfer pricing dempe analysis might show that a local subsidiary performing high level research deserves a higher share of the profits than a foreign parent that only provides funding. This shift in focus prevents the artificial shifting of profits to low tax jurisdictions through the simple licensing of trademarks or patents.
The resulting profit split must be consistent with what independent enterprises would have agreed upon in similar circumstances. It ensures that the tax base of the country where the value is created is not eroded by intercompany charges.
Economic Substance
Documentation must provide a detailed narrative of the daily operations related to the intellectual property. The transfer pricing dempe analysis requires evidence of the actual involvement of the local entity in the development of the technology. Tax bureaus use this information to challenge any royalty payments that do not reflect the underlying economic reality of the business.