The State Administration of Taxation (SAT) of China recently concluded the first advance pricing agreement (APA) for a cost sharing agreement (CSA) with a Fortune 500 enterprise in Guangdong Province. The CSA-APA focuses on international R&D costs and confirms that the R&D costs borne by the taxpayer relating to the development of intangible assets are deductible for corporate income tax (CIT) purposes and exempt from withholding tax during the 8-year period covered by the CSA-APA.

Cost sharing agreements (CSAs) are newly added content in the Implementation Measures of Special Tax Adjustments (Trial version) (Circular 2), to promote investment in new technology and development of intangible assets in China. The participants to CSAs share in the costs of R&D activities and have the right to enjoy the benefits from the developed or transferred intangible assets.

CSAs are a complex area of transfer pricing and involve issues such as the proper aggregation of global R&D costs and the matching of shared costs and benefits from intangible assets.