Being prepared helps avoid costly tax negotiations in China, says lawyer

By Katie Bird

- Last updated on GMT

Related tags: Marketing, China

When targeting China, cosmetics companies can face costly negotiations with tax authorities, according to Sandra Hazan of legal firm Salans.

Hazan, who will give a presentation at the upcoming Luxe Pack show in Monaco, advises companies in the luxury markets to be prepared in order to help navigate the complex fiscal landscape.

Transfer price problems

One of the main obstacles that a company can face when trying to enter the Chinese market are transfer price issues, Hazan explained.

These only become a problem when a company is selling from one branch of its operations to another, for example from its French arm to its Chinese arm, so often affect a company at the later stages of its market penetration.

As a first step into a new market such as China a cosmetics company will usually start by distributing directly to Chinese retailers or using a third party agent, she explained. It is when this third party agent becomes integrated into the parent company, or when a new subsidiary is created that there can be complications with transfer prices.

Tax authorities scrutinise prices

As soon as a company starts transferring products from one arm to another, the tax authorities of the relevant countries will start to scrutinise the prices that are set, Hazan explained.

“For example, say the French company sells a perfume product for 50 euros to the Chinese company. The French tax authorities might argue that it should have been sold for 100 euros. Selling it at a lower price will reduce the profits the French company will be making and therefore the tax they have to pay.

“Similarly, if the product had been sold at 100 the Chinese authorities might argue that the price is too high, reducing the profits the Chinese company can make and the tax it will pay,”​ she told CosmeticsDesign-Europe.com.

If the authorities wish to challenge the prices set and negotiate them this can result in significant tax adjustments, sometimes to the tune of millions of euros, she said.

Rigorous documentation

For Hazan, the key is to prepare well and document the prices set and the justification for them.

“My first piece of advice would be not to wait until they are experiencing problems, for a start,”​ she said.

Anticipate such complications by settling prices within the group from both a commercial standpoint but also taking in to account any of the tax issues that could arise, she advised.

Rigorous documentation, which includes the prices set and the reasons behind them, is also important as the tax authorities inspection may arise some years after the event and without documentation it can be very difficult to justify the decision, she added.

Sandra Hazan will be presenting at the Luxe Pack show that runs in Monaco from September 19 to September 21, 2011.

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