(Source: https://pltfrm.com.cn)
China’s tax system addresses transfer pricing issues with foreign companies through a comprehensive set of regulations and enforcement mechanisms, focusing on ensuring that transactions between related parties are conducted at arm’s length prices. As of my last update in April 2023, the key aspects of China’s approach to transfer pricing include:
- Transfer Pricing Documentation: Companies are required to maintain and submit detailed transfer pricing documentation. This documentation includes information on the organizational structure, nature of business activities, related party transactions, transfer pricing policies, and comparability analysis. The documentation serves to justify the pricing of transactions between related entities.
- Related Party Transaction Reporting: Companies must report their related party transactions in their annual corporate income tax filings. This includes disclosing the nature and value of transactions with both domestic and foreign related parties.
- Arm’s Length Principle: The foundation of transfer pricing regulations is the arm’s length principle. It requires that the terms and pricing of transactions between related parties are consistent with those that would have been agreed upon by independent entities in similar circumstances.
- Advance Pricing Agreements (APAs): Companies can enter into APAs with the Chinese tax authorities. An APA is an agreement that determines the transfer pricing methodology for certain transactions over a fixed period in the future, providing certainty and reducing the risk of future transfer pricing disputes.
- Range of Methods: China’s transfer pricing regulations allow for various methods to establish arm’s length prices, including traditional transaction methods (Comparable Uncontrolled Price, Resale Price, Cost Plus) and transactional profit methods (Transactional Net Margin Method, Profit Split Method).
- Benchmarking Analysis: Companies are expected to perform a benchmarking analysis to determine whether their transfer pricing is in line with the arm’s length principle. This involves comparing related party transactions with similar transactions between independent parties.
- Special Focus on Intangibles and Services: The Chinese tax authorities pay particular attention to transactions involving intangibles and services, due to the higher risk of profit shifting in these areas.
- Country-by-Country Reporting (CbCR): Large multinational enterprises are required to submit CbCR reports, which
provide a breakdown of the amount of revenue, profits, taxes, and other indicators of economic activity for each country in which they operate. This helps the authorities assess the risk of profit shifting and base erosion.
- Anti-Avoidance Rules: China has robust anti-avoidance rules to combat tax evasion through transfer pricing. The tax authorities have the power to make adjustments if they determine that a company’s transfer pricing does not comply with the arm’s length principle.
- Penalties for Non-Compliance: Companies that fail to comply with transfer pricing rules, including inadequate documentation or non-arm’s length pricing, can face penalties, including adjustments to taxable income, fines, and interest on underpaid taxes.
- Increasing Scrutiny and Enforcement: The Chinese tax authorities have been increasing their scrutiny and enforcement of transfer pricing regulations, including more frequent audits and investigations into multinational companies.
- International Cooperation: China actively participates in international efforts to curb tax base erosion and profit shifting (BEPS), aligning its transfer pricing rules with global standards set by organizations like the OECD.
Foreign companies operating in China need to be particularly diligent in their transfer pricing practices and documentation, ensuring compliance with Chinese regulations. Given the complexity of these rules and the risks of non-compliance, many companies seek advice and assistance from tax professionals who specialize in transfer pricing and are familiar with the Chinese tax environment.
PLTFRM is an international brand consulting agency that works with companies such as Red, Tiktok, Tmall, Baidu, and other well-known Chinese internet e-commerce platforms. We have been working with Chile Cherries for many years, reaching Chinese consumers in depth through different platforms and realizing that Chile Cherries exports in China account for 97% of the total exports in Asia. Contact us and we will help you find the best China e-commerce platform for you. Search pltfrm for a free consultation!
