The state of transfer pricing controversy in Asia’s leading markets
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The state of transfer pricing controversy in Asia’s leading markets

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Aaron Wang, Vrajesh Dutia and Chris In explain how adopting global best practices has proved to be beneficial for the development of dispute resolution procedures in China, India and South Korea.

China, India and South Korea have had formal transfer pricing (TP) regulations in place for more than a decade. Over this period, many multinational enterprises (MNEs) have experienced some form of TP controversy, such as enquiries or audits by authorities in the region, especially in China and India.

The controversy environment in these countries has also undergone many changes – from selection of cases for audit by means of data analytics, to shifts in the type of issues that generate controversy, and the increased use of advance pricing agreements (APAs) and mutual agreement procedures (MAPs) as effective dispute avoidance and resolution tools.

In addition, tax authorities in China are gaining detailed expertise with respect to specific sectors or specific subject matters; in contrast, India has put an emphasis on reducing the plethora of litigation cases by means of settlement schemes, reducing the number of appeals filed by tax authorities, and moving towards more effective use of APAs and MAPs. The common theme in all three countries is an emphasis on learning and adopting global best practices and putting these best practices to use in APAs and MAPs with developed countries.


In the process of combining two former tax bureaus at local level, the central office of the China State Taxation Administration (STA) sought to adopt a more efficient mechanism for TP audits, in part to reflect China's commitment to the OECD's BEPS Action 14, which becomes more important in view of the COVID-19 pandemic and global political conflicts.

The STA has deployed many of its MAP and APA resources following the thread of competent authority (CA), aiming to increase the expertise and experience of its personnel, in line with those of its treaty partners, particularly in Asia. This trend can be seen in the annual public statistics on concluded APA cases in recent years. For example, bilateral APAs (BAPA), dominate the total number of resolved cases, and over 65% of the 44 BAPA cases that the STA signed during 2005-2018 were with Asian jurisdictions (represented by Japan and South Korea). This, however, does not necessarily mean a reduction on unilateral APAs in China, which can still be instrumental in preventing future TP controversy (for example when an audit for recent years has been concluded) or when difficulties are envisaged in obtaining a bilateral agreement with the other CA.

With respect to TP audits, many cases in China are led by STA using a centrally-driven approach, focusing on specific types of transactions such as services and royalty fee payments. Over the past few years, an alternate approach has been explored, as some audit cases were initiated and led by provincial/local tax bureaus, supported by information and data collection schemes (e.g. 'global supply chain data' and '1000 enterprises' schemes).

With an increased number of experienced personnel in the anti-avoidance department, the STA still orchestrates audits on a nationwide basis. Certain initiatives are delegated to specialised anti-avoidance teams at provincial and local level (amid streamlining of taxation administration). Thus, initiating a large TP audit case does not necessarily follow a 'top-down' approach.

Having said this, the process used to select TP cases for audit has become more sophisticated, the period of investigation and negotiation have become longer (as long as 10 years, based on the statute of limitations), and involvement of government officials has become more extensive (tax officials from local, provincial and central STA level may participate, in addition to the panel of TP experts). Certain local jurisdictions have started to increase their expertise in specific industry segments (e.g. automotive, pharmaceuticals, etc.), or specific topics such as ownership of intangible property or valuation of equities in relation to transfers, as well as other topics in relation to wider BEPS initiatives.

Value chain analysis continues to be a common thread that runs through national and local initiatives. In the wake of the BEPS initiatives and a recent revision of China's TP rules, Chinese tax authorities often apply value chain analysis as an empirical test and/or cross-reference for a conventional TP analysis, rather to support application of a one-sided transactional net margin method (TNMM) analysis or a profit split exercise.

Separately, inbound Chinese businesses often experience controversy with the Chinese customs authority with respect to their import prices in the supply chain. Because customs and tax administration are separate functions in China, not surprisingly, there may be divergent views regarding the pricing of related party transfers. As interactions between these two functions increase in the coming years, it may be reasonable to anticipate that a more coordinated approach will evolve regarding cross-border transfers of tangible property between related parties.


The TP controversy environment in India has matured in the last decade. The tax authorities have moved from doing en masse audits, selected largely on quantum of international transactions, to using data analytics in identifying high-risk cases. This is being done using an integrated data warehousing and business intelligence platform. The specific risk parameters used are not disclosed, but based on experience they are mostly in line with factors commonly used by other countries, such as the taxpayer's audit history, presence of transactions involving intangible property, business restructurings, management charges etc. This case selection factors also incorporate considerations like non/partial-compliance with TP filings, search and seizure cases and prior-year adjustments upheld at the judicial level.

The issues generating controversy have also advanced from selection of comparable companies to more complex topics such as royalties, loans & guarantees, advertising and marketing promotion (AMP) payments, etc.

As a result of these changes, the number of audits has declined in the past few audit cycles. In order to dissuade unnecessary appeals by the tax authorities against favourable orders given to taxpayers, the monetary thresholds for filing appeals have been raised. However, the number of cases pending at various judicial levels continues to remain high. Hence, to bring certainty and reduce the year-on-year litigation burden on taxpayers, APA and MAP remain the most effective solutions.

Under the APA scheme in India, a taxpayer can obtain certainty for up to nine years by applying for an APA with rollback. The average time to conclude an APA in India is about 36 months. Over the past seven years, close to 1,200 APA applications have been filed, out of which 320 agreements have been signed as of December 2019, covering simple as well as complex transactions. However, nearly 90% of the signed agreements are unilateral APAs. The limited number of BAPAs shows that implementation of APAs in India is still at a relatively early stage.

The majority of the BAPA applications are with only four countries – US, UK, Japan and Switzerland. One of the key reasons for the small number of BAPAs and limited to a few treaty partners is that historically the Indian tax authorities insisted that the applicable tax treaty include Article 9(2) or its equivalent. This precondition was eliminated in November 2017, which came as a welcome step for taxpayers and going forward it is expected that more BAPAs will be signed by India.

MAP has also proved to be a useful mechanism in resolving TP disputes. During the period between April 2014 and December 2019, approximately 660 tax disputes involving about 180 taxpayers have been resolved under MAP. Based on the recommendations of the OECD's peer review report and India's commitment to implement BEPS Action 14 action points, the tax authorities amended the existing regulations on MAP in May 2020; the key highlight being that the Indian CA shall endeavour to arrive at MAP resolution within an average period of 24 months. The OECD MAP Statistics for 2018 show that India has a large inventory of pending MAP cases relating to TP – more than 700. Hence, a time bound commitment would clearly help in resolving taxpayer issues.

Over time, the CA meetings have also become pragmatic; in the past few years we have seen that the CAs are agreeing on lower mark-ups compared to mark-ups imposed at the audit stage. There have also been rulings that APA and MAP results may have some persuasive value before the courts for on-going cases.

Overall, the TP controversy landscape in India is showing signs of maturity which augurs well both for taxpayers as well as tax authorities. This would also help in improving the ease of doing business in India; the key will be to sustain the momentum.

South Korea

The South Korean tax regime recognises a number of potential ways to resolve TP controversies and disputes. Such remedies mainly consist of tax appeal procedures available at the conclusion of a tax audit and procedures followed by CAs.

Subsequent to the tax audit but prior to receipt of the tax assessment notice (TAN), a taxpayer may file a request for a review of appropriateness on tax imposition. After receipt of the TAN, the taxpayer has additional remedies available before filing an administrative protest. Specifically, the taxpayer may file an objection to the District Tax Office or a commissioner of the National Tax Service (NTS) in the region that issued the TAN.

Alternatively, the taxpayer may also make a request for an examination to the Commissioner of the NTS or an appeal to the National Tax Tribunal (NTT) without filing an objection. The taxpayer, however, cannot request both an examination and an appeal on the basis of the same disposition. The taxpayer may instead elect to appeal to the Board of Audit and Inspection (BAI) for examination and appeal. Finally, the taxpayer can file an administrative protest only after he has made an appeal to at least one of NTS, NTT, or BAI.

Whereas the above-mentioned procedures involve taking a position opposed to the tax authority, other TP dispute resolution mechanisms rely on a cooperative approach to reduce tax risks. When the tax authority of one country disagrees with the arm's-length price of cross-border controlled transactions, the tax authority may impose additional taxes, which poses a risk of economic double taxation.

In this situation, assuming a tax treaty is in place, the taxpayer may request the tax authorities to invoke the MAP and resolve the underlying tax dispute, with the goal of eliminating double taxation. In most cases, an agreement between the CA of South Korea and the CA of the treaty partner must be reached within five years from the date of commencement, with the potential to continue for an additional three years. Statistically, the normal MAP processing time in South Korea takes from to two to five years, depending on the complexity of the case.

The APA procedure is another way to reduce potential tax uncertainty regarding cross-border related party transactions and to minimise the tax risks occurring from TP audits. The APA procedure is initiated at the taxpayer's request and any agreement is subject to the approval of the Commissioner of the NTS. Once an APA is concluded between the CAs, the taxpayer can use the approved TP method as the most appropriate method and the taxpayer's transfer price is accepted as arm's-length during the APA term, so long as the taxpayer complies with the terms and conditions set out in the APA.

The APA primarily applies to the transfer pricing of future inter-company transactions, but taxpayers may also request that APA results be rolled back to past years. The average time to conclude an APA is one year and nine months for a unilateral APA and two years and six months for a BAPA. One noteworthy change in the APA process is that starting in 2020, a new team was created in NTS to exclusively run pre-filing meetings (PFC). Previously, PFCs were allocated to different teams by territories. Taxpayers may face some delay in securing a PFC, as they will only have a single channel to request a PFC in NTS.

In general, a tax audit is not suspended by an APA request raised by the select tax audit taxpayer. The NTS, however, may suspend the audit on transactions during the APA-covered period if the taxpayer appropriately requests an APA on the transactions at issue before it receives notice of a tax audit.

Click here to read the entire 2020 Deloitte/ITR Transfer Pricing Controversy guide

Aaron Wang


Deloitte China

T: +1 381 827 5677


Aaron Wang is a partner of Deloitte China based in Shanghai. He has nearly 20 years of experience as a TP specialist advising multinational companies.

Aaron has served clients across a wide range of industries and has been active in controversy resolutions such as TP assessments, national tax audits, and has helped multinational companies secure certainty on their complex TP issues. As a project leader, he has concluded bilateral APAs, bilateral APA renewals and MAPs for quite a few of his clients.

Aaron started his professional career in Shanghai and has worked in Beijing, Singapore and Suzhou at different stages of his career before his returning in 2014. This experience greatly expanded his professional exposure and network.

Vrajesh Dutia


Deloitte India

T: +91 80 6188 6729


Vrajesh Dutia is a partner in the TP service area based in Bangalore, India. He has more than 15 years of experience in TP planning, audit defense, compliance and global documentation projects for MNEs.

Vrajesh was involved in setting up the Deloitte's global transfer pricing centre (GTPC) based in India. He manages large and complex projects in the GTPC and coordinates with various Deloitte member firms across Europe, the Middle East and Africa. He is also part of the Deloitte's TP controversy network leadership team.

Vrajesh has worked on a number of large TP projects for both planning and global documentation purposes covering inbound and outbound transactions. He provides advice to MNE clients in India in TP advisory, planning, compliance, and audits. His clients cover across various industries, including engineering, fast-moving consumer goods (FMCG) and information technology.

Vrajesh is a member of the Institute of Chartered Accountants of India.

Chris In


Deloitte South Korea

T: +82 2 6676 2448


Chris In is a partner of the global TP group in South Korea. Prior to joining Deloitte Anjin, he held various positions at leading accounting firms such as Samil PwC in South Korea, and PwC and Deloitte in the US.

Chris has extensive experiences in various types of TP projects including bilateral and unilateral APAs in the US, UK and South Korea. He has worked on a number of audit defences, inbound and outbound documentation, and planning studies in industries such as automobiles, consumer products, financial services and pharmaceuticals. Chris serves several of Deloitte's largest MNE clients in the region.

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