Bloomberg Tax
July 9, 2020, 7:00 AM

INSIGHT: Considerations for Sales, Marketing Service Providers of Multinational Companies Operating in China

James Zhao
James Zhao
Deloitte China
Rachel Zhao
Rachel Zhao
Deloitte China

Due to its huge consumer market, China is an important sales destination for many multinational companies (MNCs).

In addition to indirect sales through third-party agents, there are a few commonly seen direct sales models involving tangible products by MNCs when they sell to the China market. These models include transferring technologies and establishing manufacturers in China to do local production and sales directly, setting up a distribution company in China that purchases products from overseas related-party manufacturers and sells to domestic customers, and interfacing with and selling directly to China customers via digitalized and remote approaches without a physical presence in China. On many occasions, MNCs have set up service providers in China to provide marketing and sales support assistance to overseas related-parties during the latter’s direct sales of products to domestic third-party customers (sales and marketing service model) .

The above sales models often involve complicated international tax issues, such as technology transfer and related-party purchases that are governed by transfer pricing rules under the traditional international tax regime, while the digitalized remote sales are going to be covered by the on-going discussion led by the Organization for Economic Cooperation and Development (OECD) over the “unified approach” on taxing rights over the digital economy.

Sales and Marketing Service Model

Under the above sales and marketing service model, contracting parties in a sales contract are the overseas related-party and domestic customers in China. The Chinese sales and marketing service provider of the MNC does not take title to the products under sale, but only provides marketing and the sales support services to the overseas related-party. Under this model, a common approach for the service provider to determine and collect service fees from the overseas related-party would be a service cost plus a certain level of mark-up.

Transfer Pricing Considerations

With China’s tax authorities’ increasing scrutiny over transfer pricing administration when they examine the profitability of certain sales and marketing service providers, they may not only focus on the profit mark-up rate applied to the service costs. Rather, more attention would be paid on whether the transfer pricing results align with the function and risk profile and value contribution of those Chinese entities involved in the transactions.

Under certain circumstances, a marketing and sales service provider may not take title to the products, thus bearing no risk associated with products ownership. However, its sales and marketing activities may potentially go beyond the activities normally conducted by common supporting or customs liaison service providers. In such a case, the cost-plus transfer pricing policy to determine services fees may not be fully aligned by the China tax authorities, which require the consideration of MNC management on the right profit level when determining the transfer pricing policies.

Agency-Type Permanent Establishment and Profit Attribution Considerations

In accordance to the Action 7 of OECD’s Base Erosion and Profit Shifting (BEPS) Action Plans, the Model Tax Treaty has broadened the definition and scope of agency-type permanent establishments (agency permanent establishment), which has aroused widespread attention and concerns over the agency permanent establishment issues. China has chosen not to explicitly revise its domestic rules and regulations related to the agency permanent establishment according to the BEPS Action 7, while it is generally believed that the interpretation of the concept of agency permanent establishment by the Chinese tax authorities has already reflected the essence of the OECD BEPS Action 7.

Taking the commonly referenced tax treaty between China and Singapore as an example, where a person (except an independent agent), is acting on behalf of an enterprise of the other contracting state in one of the contracting states, has and habitually exercises in the counterparty contracting state an authority to conclude contracts in the name of the foreign enterprise, the person shall be deemed to have constituted an agency permanent establishment in the counterparty contracting state, unless the exemption rule for preparatory or auxiliary activities is applicable. It is recommended that readers check the individual tax treaties to assess agency permanent establishment definitions as the individual tax treaty may have some differences. Regarding key concepts involved, it is commonly interpreted that the Chinese tax authorities have the following technical positions:

  • The phrase “conclude contracts in the name of the entrusting enterprise” shall be construed in a broad sense, which includes circumstances in which a contract concluded not in the name of the enterprise is still binding on the enterprise.
  • The term “conclude” refers not only the conclusion of contract itself, but also the agent having the authority to participate in contract negotiations and discuss clauses of contracts on behalf of the entrusting enterprise, etc.
  • The term “contract” as used in this paragraph refers to a business contract related to the operation activities of the entrusting enterprise, but does not include the circumstance in which an agent has the authority to conclude a contract involving only the internal affairs of the enterprise.
  • There are no precise and unified standards for the meaning of the term “habitually,” and a judgment shall be made after considering comprehensively the nature of the contract, the nature of the business of the enterprise, and the frequency of relevant activities of the agent.
  • The term “exercise an authority” shall be construed according to the principle of substance over form. If an agent for an enterprise of a contracting state carries out negotiations concerning the details of a contract and other activities in connection with the conclusion of the contract in the other contracting state, and such activities are binding upon the enterprise, even if the contract is finally concluded by any other person in the country where the enterprise is located or any other country, the agent shall still be deemed to exercise the authority to conclude the contract in the other contracting state.

It can be seen that if a China-based sales and marketing service provider is habitually engaged in detailed negotiations of contract terms, plays a major role in the conclusion of the contract, and the contract is then generally not substantially amended, it is likely to be deemed an agency permanent establishment in China for its overseas related-party (i.e., the signing party of the contract).

Where an agency permanent establishment is constituted in China, China may exercise taxation rights over profits attributable to the permanent establishment. The final report of the BEPS Action 7 takes the view that relevant changes made to the Model Tax Treaty in terms of the permanent establishment would not materially affect the applicability of the earlier established permanent establishment profit attribution principles and methods (that is, the Authorized OECD Approach (AOA)). There is no specific written guidance for the profit attribution of the agency permanent establishment in China yet, so the possibility of following the AOA in the future is not ruled out. The agency permanent establishment would be viewed as an independent entity to attribute its income and profit, and the functions, risks, and assets of the agency permanent establishment will be analyzed, and its profit attribution will be determined following the arm’s-length principle.

Alternative Approaches to Address the Transfer Pricing and Permanent Establishment Considerations

MNCs are paying increasing attention to the above mentioned transfer pricing and permanent establishment considerations. Management should consider review of their own economic activities and functional characteristics of the sales and market service provider subsidiaries in view of transfer pricing principles and agency permanent establishment assessment factors to determine whether and how the relevant issues would be addressed. Where there is a high degree of agency permanent establishment concerns, we would recommend the following aspects be considered to better address the relevant potential concerns:

  • Are other business models commercially feasible and reasonable and within regulatory bounds? What are the potential tax, customs, foreign exchange, and other practical considerations?
  • Should, and how should, the form and substance of the local affiliate be kept consistent under the sales and marketing service model to ensure it would not constitute an agency permanent establishment without compromising efficiency?
  • Is it a good strategy to proactively communicate with Chinese tax authorities to address the concerns? How to balance the pros and cons and seize the right communication opportunity and window? Is it necessary for MNCs to examine each specific case circumstance and take into account the local tax authorities’ relevant experience?

Besides the above alternatives, some MNCs may consider managing the agency permanent establishment risk via a transfer pricing approach with increased target profit.

It is worth noting that under the sales and marketing service model, transfer pricing and agency permanent establishment considerations may co-exist and do not preclude each other automatically. Based on China’s current regulations, how to address the interaction between transfer pricing and agency transfer pricing from regulatory perspectives remain unclear. As such, MNCs need to comprehensively consider their specific case situation, and relevant local tax authority experience before determining the appropriate approach and whether to proactively communicate with the local tax authorities to address the issues.


With the finalization of the BEPS Action 7, MNCs and tax authorities have paid increasing attention to agency permanent establishment issues under the sales and marketing service model. Transfer pricing consideration has also been on the table, especially since the transfer pricing related BEPS Action plans (e.g., Actions 8 and 13). Given the general interpretation that China follows—the OECD principle but with details remaining unclear—MNCs may face potential tax issues from transfer pricing and from the agency permanent establishment perspective for their sales and marketing service model of selling into China. Although solutions to the relevant issues need to be carefully considered with the clarification of future regulations, companies may still consider various approaches to take advance measures to address the potential issues. It is also important to take into account the balance between tax and other operational considerations whilst considering the alternatives.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Please note that the views of this article are of the authors’ own, and it should not be treated or should not be viewed as representing any official view or advice from Deloitte.

James Yimin Zhao, PhD, economist, is a tax and transfer pricing partner and leading tax partner at Deloitte Life Sciences & Health Care Industry. He can be contacted at 86 – 21 - 6141 1198 and

Rachel Zhao is a senior manager of transfer pricing and can be contacted at 86 – 21 - 6141 1482

Copyright © 2020 Deloitte Development LLC. All rights reserved.

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