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Recap • Transfer Pricing Management in a Post Covid World

On the 17th of September 2021, the British Chamber of Commerce to Shanghai hosted the “Transfer Pricing Management in a Post Covid World” and asked guest speaker Russell Brown OBE, Managing Partner of LehmanBrown International Accountants, to share his experiences. The Webinar was also directed by Kari Hakanen, Chair of the Financial Services Committee of the British Chamber of Commerce.

Russell shared that with the world coming out of a pandemic, the government will begin reviewing ways to generate more funds to help boost their respective economies and reduce or keep debt levels at an acceptable level. Raising tax would be the traditional way of levying tax, but governments can also look to challenge corporations on where they pay tax elsewhere in the world relative to what they pay in their jurisdiction. This is why international companies should review their transfer pricing strategy where they have related party transactions in the event of a transfer pricing review.

In China, Transfer Pricing is a matter of conducting proper industry research and educating the authorities about the industry, its risks, and the supply chain. China’s robust tax systems means that they will likely have more information than the company, but it is also willing to be educated about the industry and specific circumstances surrounding the company. Russell recommended that companies do not wait for the authorities to appear to do transfer pricing as the time available for providing supporting information can be as little as seven days. Thus it is better to avoid risks and prepare a transfer pricing report beforehand.

Transfer Pricing is not a science but an art form, as it is about finding a balance between two or more countries. Hence, the Transfer Pricing report will need qualitative and quantitative analytics, including a comprehensive company analysis, review of market competitors, business strategies, internal and external risk distribution, functions undertaken and risks assumed and asset investment and return.

The purpose of having conducted some analytics, chosen and provided supporting to demonstrate appropriate transfer pricing methodologies, and having a report that explains the situation of the business is for presentation if a review is undertaken, to defend the company’s position, but also to make the review easier for the officials.

During an investigation, one must understand that the investigators are simply doing their job, being courteous, and offering only the information they require to avoid any misunderstandings. As the investigations by the authorities can go back a few years, it is important to have Transfer Pricing reports done annually, avoiding any eventual problems. Whilst companies that meet the size criteria for related party transactions need to do an annual filing; other foreign businesses still need to have an annual audit report completed and to do an annual Corporate Income Tax filing, which includes some related party information.

In closing, Russell shared about the global movements to sharing of information, including the Common Reporting System, tax treaties and information sharing agreements etc., and that many low tax or no-tax jurisdictions now had information-sharing agreements in place, and so it was important for companies to review their structures as such provided a high risk of review. Russell then shared the example where a company had been stuck making a loss for two years and was investigated.

Because the Transfer Pricing report had adequately explained their situation, being an increase in raw material prices, the FX rate going against them on the sales price, which was fixed in another currency for this period, the investigators accept their argument and no adjustment was made.

Missed the Presentation and Questions?

Those who missed the presentation or have questions about their specific company situation and want to be prepared can send their inquiries to enquiries@lehmanbrown.com.

LehmanBrown International Accountants has helped many companies in China and abroad resolve the Transfer Pricing issues and understand that each company is unique in its struggles and needs tailored solutions and guidance throughout the process.

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