Some jurisdictions, like the Chinese State Administration of Taxes (CSAT), include location savings as a key topic in a transfer pricing analysis. CSAT is particularly clear on its expectations on this front. It will only consider an APA when the enterprise has provided a thorough value chain/supply chain analysis that takes into account China’s location-specific advantages such as cost savings and market premiums in choosing and applying an appropriate transfer pricing methodology.
The OECD, UN, and United States transfer pricing rules recognize that tax administrations and controlled MNE (multinational enterprise) groups must consider location savings adjustments when uncontrolled comparable enterprises operate in different geographical markets from the tested party. Location savings adjustments are needed when we can measure (in different geographic markets; e.g., UK versus Nigeria or South Africa or US versus Brazil or Mexico) significant differences in wage shares and adopted technology measured by incremental capital/output ratios.
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