2 / 3
When a business transaction occurs between businesses that are
controlled by the same entity, the price is not determined by market
forces, but by the entity controlling the two businesses. This is called
transfer pricing. An example is a transaction between a parent and
its subsidiary, or other intra-group transactions.
These transactions can be used to shift funds - and thereby profits.
Such transactions can serve as a tool for finance and tax planning.
For instance, China’s foreign currency control regulations only allow
one dividend issuance to a foreign entity a year. Moving funds out of
China by using inter-company transactions can then offer a solution.
In this report on Transfer Pricing, we discuss what types of transactions
foreign investors can use to shifts funds in this way.
Double taxation agreements between countries play an important
role in transfer pricing. These allow foreign investors considerable
tax savings when using offshore holding companies – under certain
conditions.
Intra-group transactions often serve a legitimate purpose, but tax
authorities around the world are wary of their use in lowering corporate
profits. China is no different. Like in other countries, the Chinese tax
office sets standards as to what transactions are acceptable. Those
that do not meet these standards are not recognized.
If done properly, transfer pricing can save a foreign investor a
substantial amount on their tax bill. However, careful planning is
advised: transfer pricing transactions are under special scrutiny. In
case of non-compliance, the back taxes and penalties can be severe.
Dezan Shira & Associates can assist your company in planning transfer
pricing transactions, and furnishing the required documentation. If you
would like to learn more about transfer pricing and how we might
assist you, please do not hesitate to contact us.
ALBERTO VETTORETTI
Partner
Dezan Shira & Associates
INTRODUCTION
What is Transfer Pricing in China?