Wondering if someone could provide some advice, I’ve never seen this situation before – I’m working in Beijing/HK at the moment. Company A in mainland China buys raw materials, and provides (not sells) these materials at no cost to Company B which is a processing facility. Company B uses the raw materials provided by Company A, also adds some of it’s own materials into the process, and then sends finished goods back to Company A. Company A then pays a service fee (including some additional raw materials) for these finished goods to Company B. Company C is in Hong Kong and owns 100% of Company A. Company B also provides finished goods to Company C, however Company C doesn’t pay Company B a service fee, it pays Company D – which is a HK representative office of Company B. In this transaction, Company C is provided with cheaper finished goods than company A, because the cost of the raw materials stays in company A, and is not passed on at any point. The margins are high in Company C in HK, and low in Company A in Mainland China. Sales that take place in Mainland China seem ok, because Company A will put its raw materials into COGS when they are utilised by Company B, and has a returned finished product to sell, so the value in COGS represents it’s true production cost, BUT the product that is sold through HK doesn’t have an accurate COGS, as it’s missing raw materials that remain in Company A. So my issues are: - Company A retains cost when the COGS should be with Company C - I don’t think I can ‘gift’ inventory from Company A to Company C at zero value to correct this, plus it’s cross border so I’d have to export it (China to HK) - I’m effectively profit shifting from China with a tax rate of 25% to HK which is only 16.5%. - With an outsourced processing plant (company C) when does ownership of finished goods occur? Especially for Company C? Apologies if the above is not well explained!
