• Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 7/11/2013

China - Tax authorities evaluate cross-border transactions of auto industry 

July 11: The automotive and auto component sector has been under increasing scrutiny of the Chinese tax authorities because of the industry’s operational scale, capital size, and organizational structure.

With such scrutiny, the challenge may be even greater for foreign multinational corporations with a large number of cross-border transactions. The major tax, customs, and foreign exchange issues commonly seen in cross-border transactions in the auto industry in China include:

  • Compensation for moulds - It is a common industry practice for overseas auto parts suppliers to seek compensation from customers for the costs of developing or purchasing moulds required for parts production.
  • Customs valuation - To determine there has been payment of proper duties and taxes, China customs authorities have paid more attention to the valuation of related-party transactions—especially non-trade payments such as royalties and service fees.
  • Tariff classification - Determining the correct harmonised system (HS) code for tariff classification purposes is important because the applicable customs duty rates, import licenses/certificates, and VAT refund rates for specific imported/ exported goods are determined based on the HS code.
  • Ownership of customer-based intangibles - China tax officials have long taken the position that seemingly limited-function / limited-risk PRC entities are undertaking valuable local marketing efforts and thus must be compensated appropriately for their ownership and development of these local customer-based marketing intangible assets.
  • Selecting the appropriate method to test intercompany transactions - The State Administration of Taxation has expressed its preference for applying the Residual Profit Split Method (RPSM) instead of the more commonly applied Transactional Net Margin Method (TNMM) in determining the appropriate level of profitability attributable to the local manufacturer’s contribution to the intercompany transaction.
  • Transfer pricing implications of barriers to entry in the market - Auto companies operating in China face unique challenges and barriers to entry that may not be commonly encountered in other international markets.

Read a July 2013 report [PDF 630 KB] prepared by the KPMG member firm in China: China tax planning for cross-border transactions of China’s auto industry

Contact a tax professional with KPMG's Global Transfer Pricing Services.

©2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.


Share this

Share this


Subscribe to receive the latest TaxNewsFlash email alerts (you must select the option for TaxNewsFlash)

Already a Subscriber? Login

Not a member? Subscribe now