In this issue of China Briefing, the focus is on "Transfer Pricing" in China, a topic increasingly discussed by Chinese authorities and multinational companies operating within the country. The principle of 'arm's length' in determining intergroup transactions prices has been actively applied since the implementation of the new Corporate Income Tax law last year.
Key points from this report include:
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Understanding Transfer Pricing: This refers to the pricing of transactions between related entities in multinational corporations operating in China. It's crucial for tax compliance and ensuring fair profit allocation among affiliated companies.
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Document Preparation: Preparing detailed documentation on price policies is mandatory for every multinational company. This includes information on related parties and transactions, which must be disclosed during tax declaration. Companies should also be prepared for potential audits by the Chinese tax authorities.
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Risk Management: Managing risks associated with transfer pricing is essential. This involves accurate pricing strategies, documentation, and understanding the implications of audits.
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Accurate Transfer Pricing System: An effectively designed and implemented transfer pricing system can support an organization's economic model, business objectives, and optimize its global tax burden.
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Regulatory Changes: Recent Chinese regulatory developments, including the general transfer pricing regulation issued at the beginning of 2009, have indicated that China is not an exception to the rule regarding transfer pricing.
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Activities and Transactions: The report outlines various types of activities and corresponding intergroup transactions that fall under transfer pricing rules, such as raw material supply, finished goods sale, intellectual property use rights, know-how provision, service provision, financial guarantee payments, financing, royalty payments, service fees, and interest payments.
The report aims to provide practical advice on designing appropriate selling prices, documenting related transactions, managing overall risk, and defending a company's position in the event of administrative reviews. It underscores the importance of a well-designed transfer pricing system in supporting a multinational company's economic model, business goals, and optimizing its global tax burden.
