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Transfer pricing regulations in China are rapidly developing as the Chinese authorities target transfer pricing adjustments as a major tax revenue earner in the years to come. China requires the annual reporting of transactions between associated enterprises and has been questioning situations where it perceives that arm's length prices have not been used. Under China's transfer pricing rules, it is easy for two companies to be considered "associated enterprises", while in many other jurisdictions the same parties would not be considered related. Since there are only limited levels of tax appeal in China, most taxpayers will want to avoid a tax dispute getting to the assessment stage. In this connection, the companies should therefore assess their risks and document their transfer pricing policies in their China operations.
What should you expect from a Transfer Pricing preventive measure?
- Transfer Pricing Risk and Opportunity Assessment Review - to evaluate the PRC entity's transfer pricing position and provide practical recommendations to mitigate the risks and explore planning opportunity.
- Functional Analysis and Benchmarking Study - to identify and document the risks and functions undertaken by your PRC entity and the relevant group companies and their respective assets (both tangible and intangible) owned. Thereafter, to compare the profit position of your PRC entity by using appropriate transfer pricing methodologies with those of third party comparable companies. This documentation will serve as an important part of defense documentation should the transfer pricing position be challenged.
- Advance Pricing Agreement - This is an agreement between tax authorities and taxpayers on future application of transfer pricing policies. This is an effective measure to mitigate the future transfer pricing risks of your PRC entity by ensuring that its future profits will be accepted as reasonable by the tax authorities.
- China Profit Alignment - This is a transfer pricing tax planning service designed for MNCs with multiple Foreign Investment Enterprises in China. It provides a framework to allow your company to take advantage of certain organisational developments, while at the same time reducing your taxes and documenting your transfer pricing position.
- Defense Documentation - to analyse your group situations, perform analysis and prepare the documents to help support your PRC entity's transfer pricing position when being challenged by the PRC tax authorities.
- Cost Sharing Arrangement ("CSA") - This is a method of sharing the costs and risks of the development of intangibles. Each participant in the CSA must bear its share of cost and risks and in return will own whatever results from the arrangement. Through R&D analysis, economic analysis and negotiation with tax bureau, CSA can help to mitigate or resolve existing risks such as double taxation, and reduce exposure to senior management.
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