Location Specific Advantages (LSAs)

Tax authorities in emerging markets such as China and South East Asia are paying more attention to LSAs.

LSAs generally refer to location savings on the supply side  and market premiums on the demand side.

Location Savings

In the context of transfer pricing (TP), ‘‘location savings’’ generally refer to (net) cost savings realized by an MNE (multinational enterprise) as a result of relocating  some of its operations from a ‘‘high cost’’ to a ‘‘low cost’’ location.

Market Premiums

On the other hand, market premiums refer to location specific ability to sell products at a higher price.

In a United Nations Transfer Pricing (“TP”) Manual released in 2012  China’s State Administration of Taxation (“SAT”) indicated that China would promote the LSA concept in future practice.

Current  challenges include how to identify, quantify and allocate LSAs.

LSAs in China are particularly relevant for the automobiles and luxury goods industries.

Takeaways

Although LSAs are still in their development stage in terms of application by the Chinese tax authorities  MNEs should start paying attention to their China TP policy to see if LSA factors are taken into consideration and appropriately addressed and documented.  A good starting point may be analysis of the MNE’s supply chain value drivers and local market characteristics on the demand side.

As China continues its economic growth and increases its dominance in international trade  we can expect China’s SAT to want its “fair share” of global taxes to be in line with China’s contribution to global profits and economy.  A  high-ranking tax official in China was quoted as saying “China has become a major source of global profits but it does not show up in China’s tax books”

China’s SAT is becoming increasingly sophisticated and innovative in applying TP concepts and arguments in order to rake in tax revenue.

MNEs having a substantial presence in China should pay special attention to these emerging TP trends in China and the rest of the emerging markets.