Some high-tech companies perform research and development, manufacturing, and product marketing and sales functions in the domestic market; however, they are treated as contract manufacturers only and are given a lower return on a cost basis.
Furthermore, when the Inland Revenue Board conducts a transfer pricing audit of those companies, they will question the positioning of the contract manufacturer as inconsistent with its status as a high-tech company.
Inland Revenue Board will argue that high-tech companies should not be treated as contract manufacturer as it performs research and development; because of the contribution they made to the development of the core technology of its group, the high-tech company's profit margin should be larger than that of a traditional business.
When preparing the contemporaneous TP Document, please do not forget to provide information on the actual contribution of the company to the Research and Development of the Group's key technologies and any other supporting documents you have.
If a company does contribute to the research and development of the Group's key technologies, then the Group needs to ensure that its transfer pricing policy arrangements take into account this contribution from the enterprise and that it is financially rewarded appropriately.
It should explain the difference between the parent company's proprietary technology corresponding to such royalty and the company's own R&D technology, in particular, what specific benefits the company receives from the proprietary technology licenced from the parent company, and whether the benefits the company receives from the parent company's proprietary technology match the royalty.
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