Transfer Pricing in China 2016 (3rd Edition)

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10 - Transfer Pricing in China 2016
1.1 Transfer pricing at a glance
Transfer pricing concerns the prices charged between associated enterprises established in different
tax jurisdictions for their intercompany transactions. By determining the price that is charged
between associated parties, transfer pricing indirectly affects either the level of income or the level
of expense in a particular tax jurisdiction and therefore the taxable profit that may be booked in
each related entity.
Due to globalization and the need to operate in different markets, multinational enterprises are
growing in number and complexity. As a result, they transfer large quantities of goods and services
among related companies in different countries, as well as engage in a range of transactions relating
to services, intangible property and financing activities.
The pricing system for such transfers across borders within multinationals creates considerable
managerial and tax problems. This is mostly due to the direct effects on the profits of both parties
and the taxable revenue of all countries involved in the transactions.
Transfer pricing is not only a critical issue for taxpayers. From the perspective of revenue authorities, tax
auditors are increasingly looking at transfer pricing as akin to tax avoidance. Scrutiny on transactions
that have potentially been transfer priced is consequently on the rise.
Ideally, the transfer price should not differ fromprevailingmarket prices, which would be reflected in
a transaction between independent companies. However, business transactions between associated
companies may not always reflect the dynamics of market forces.