Nov. 21 – Transfer pricing concerns the prices charged between associated enterprises established in different tax jurisdictions for their inter-company transactions. Relevant prices are those for services, intangible property and financing activities.
The transfer pricing regime in China is generally consistent with the OECD guidelines and has developed rapidly over the past few years. A number of factors brought transfer pricing issues to the forefront of the State Administration of Taxation’s attention, including the tendency for FIEs in China to declare operating losses and to rely on intellectual property and services provided by overseas related parties, as well as the introduction of tough transfer pricing regimes by key trading partners. The 2008 tax changes increased the incentive to use transfer pricing to influence effective tax rates, and in 2009, the SAT released the Transfer Pricing Regulations.
China requires taxpayers to prepare and retain detailed transfer pricing documentation to support the arm’s length nature of their related party transactions. All transactions between a HQ and a Chinese subsidiary should be conducted based on the arm’s length principle, as a HQ and Chinese subsidiary are related parties according to Chinese tax laws.
Transfer pricing can create considerable managerial challenges, as it has a direct effect on the profits of both parties. Designing a transfer pricing system early in the business cycle helps to mitigate and manage transfer pricing risk exposure and ensure that the system is the most tax effective, consistent with business model and commercial objectives and documented efficiently.
