The transfer pricing refers to the allocation of costs between different units among a large multinational company for the good or services supplied. The overall transfer pricing audit case has been increasing in last couple of year, and foreigner companies should ensure compliance to avoiding transfer pricing audit and penalty.
A survey organized by Guangzhou’s municipal government released a report on tax avoidance and tax evasion by foreign-invested companies in Guangdong Province, a province that is one of China’s richest regions. The survey investigated about 10,000 foreign-invested companies in province, and determined tax evasion through transfer pricing or other illegal way.
The scrutiny of transfer pricing has extended from Guangdong Province in South China such as the Pearl River Delta to Eastern and Northern China.
Then, there is increasing demand on foreign-invested companies to formulate proper transfer pricing policies and document.
The filing and disclosure guidance concerning related party transaction are laid down in circular which is similar to those in Organization for Economic Co-operation and Development (OECD) Guide.
The common documents required by most countries include the following:
- An organization chart
- Financial data of legal entity, identify by product or segment
- A functional analysis that identify the functions performed, the assets employed and the risks exposure
- The transfer pricing method employed
- Description of comparable data from uncontrolled transactions
- Copies of all inter company agreement and invoices
- Other relevant information or items
The Chinese tax authorities use the data available among transfer pricing audit to built internal data case. With the increasing number of transfer pricing audit in China, a proper policy and documentation to be employed as management tool for foreign-invested company to manage transfer pricing risks.
Comparison Between OECD |
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PRC |
OECD |
Regulations Rules and Guidelines |
- Taxation Administration Rules for Business Transaction Between Associated Enterprises
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- Transfer pricing Guidelines for Multinational Enterprises and Tax Administration
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- New Amended Taxation for Business Transaction Between Associated Enerprises
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Definition of Related parties |
- More than 25% of direct / indirect ownership
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- Direct / indirect in capital, control or management
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- Deemed effective control
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- Under common control
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Traditional Method |
Traditional Method |
Method & Accepted |
- Comparable uncontrolled price
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- Comparable uncontrolled price
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- Resale price method
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- Resale price method
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- Cost plus method
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- Cost plus method
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Transactional profit method |
Transactional profit method |
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- Profit split method
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- Profit split method
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- Transactional net margin method
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- Transactional net margin method
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- Comparable profit method
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Availability of Benchmarking |
- Use of comparables figures by tax authories
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- Not applicable
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Requirement of Document |
- No contemporaneous documentation
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- Pricing policies should be properly documented and maintained
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- Provide information within 60/90 days upon Transfer Pricing Investigation
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Deadline to provide documentation |
- Within 4 months after the end of tax year ending for Form A-13/B13
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- No particular deadline and within a ‘reasonable’ efforts
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