Transfer pricing is a method commonly used to allocate profit by pricing a corporation’s net profit or loss between tax regions. This method is carried out through the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or the use of properties (including intangible properties). To reflect the allocation of resources among components of an enterprise, or for other purposes, this method may be used. Through formulating inter-company service and purchasing contracts, organisations are able to realise profits in low-taxation countries and shift profits around to offset losses in others. However, there are increasing restrictions on transfer pricing and simply not being aware of the regulations is no excuse for not complying with the law.
Transfer pricing in China is governed by Article 13 of Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises, and Article 24 of the Law Concerning the Administration of Tax Collection. Through these regulations the PRC government has adopted international practices to govern transfer pricing based on comparable uncontrolled transaction principles, such as the OECD and US methodologies. Using these as guides, Chinese regulations stipulate that inter-company transactions, and transactions between ‘associated entities’ should be priced using “arm’s length principles”.
As an effort to tackle tax evasion, Chinese authorities have enforced tighter regulation and imposed stringent compliance requirements. Given the limitations with tax appeals in China, avoiding a tax dispute is critical and correctly documenting your transfer pricing strategies is becoming ever more important.
Our experts at Lehman Brown can tailor transfer pricing strategies for your individual needs.
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